What do you do when you know you can no longer afford your home? What about those who may be able to afford their home, but, for whatever reason (the home has lost too much value, or it's a "money pit") just want to get out from under it? As a Michigan Bankruptcy Attorney with nearly 20 years of dealing with these issues, I have learned that answering those questions requires asking a few first. Only then can we look at answers and options. This third article of the series about Bankruptcy, Foreclosure and Home Ownership will examine some of those questions, answers, and options.

In our first article of this series, we looked at that group of people who are dead set, at all costs, on keeping or saving their homes. In the second Blog post of this series, we examined those people who don't know whether they should keep or give up their home. In this final installment, we'll examine those individuals who want to get out of their Mortgage, and how they can do that. As noted in the two prior Blog posts, this is rather heavy material, so expect to spend a little time reading. There are no quick answers to such serious questions.

Let's first define who we're talking about. It goes without saying that anyone can just "give up" their home and walk away from a mortgage. The home will go into foreclosure, and unless the home sells for at least as much is owed on it (which is unlikely for a significant percentage of homeowners), then they'll be liable for the deficiency, which is the difference between what the home ultimately sold for and what the mortgage balance was. At some point, they may be sued for that amount.

We'll be discussing those people who just want out of their mortgage without owing anything. They want to dump the house, but not walk away with the debt. In my Bankruptcy Practice, I usually hear from people in this group after they've at least inquired about the possibility of selling the home (and learning that the current market value, even if they could find a buyer, wouldn't bring enough to even pay off the Mortgage), or just having the Mortgage company take it back and call the whole thing even (and discovering that the Mortgage company has absolutely no interest in doing that).

So, within the framework of Bankruptcy, we're talking about a caller who wants to know if, and how, Bankruptcy can help them get out from under this house and not owe anything.

The first thing I need to know is how much income the caller has. If it's one spouse or partner calling, what's the household income?

Next, I'll need to learn about the caller's expenses. In my office, we'll do that analysis over the phone to determine if a person qualifies for Chapter 7 Bankruptcy. If a caller doesn't have an income that's too high, and doesn't' have too much money left over at the end of the month, then they're eligible to have their debt wiped away in Chapter 7. Of course, we'll have to figure into that equation what the caller's housing expense will be once they give up their current home.

Many of the calls that come into my office are from people who are coming up short each month. Maybe their home isn't yet in Foreclosure, but they're worried about it. Maybe they've already missed a few payments, maybe they haven't yet. In other cases, the caller is already in Foreclosure. Sometimes, a person will call after the home is already gone and they've moved out. The good news here is that it does not matter where the caller falls in this spectrum, because Chapter 7 Bankruptcy allows them to discharge any obligation they might, will or do have. In other words, even a person who isn't yet behind on their payments can walk away from their home and never have to worry about owing anything. This is true even though we don't know how much the home will eventually sell for, and how much the deficiency balance will be.

Bankruptcy discharges claims. That means that even though the person could, in theory, only owe $1 after the foreclosure, or even if they'd owe $500,000, it doesn't matter. It's the claim for the deficiency, and not the specific amount, that is wiped out by the Bankruptcy.

My office also receives a lot of calls from people who realize that they are "upside down" (meaning they owe more on the home than it's worth; another term used to describe this is "negative equity") on their home. It doesn't matter whether people in this group are current or behind on their Mortgage, or even if they have no problems making their payment each month. This group of callers just wants to get out of what they see as a bad investment. Perhaps they realize that the value of the home will not catch up to the Mortgage balance for a long time. They figure, "why should I make this payment each month, when even 6 or 7 years from now I'll still owe more on the house than it will be worth?" They realize that even if they rent a home for the same amount as they're spending on the Mortgage each month, at least they won't wind up still "in the bucket" 6 or 7, or more years down the road. And given what's happened to home values throughout the country, much less the Tri-County area, chances are good that many of those callers could rent in their own neighborhoods for less than their current Mortgage payment.

Imagine if a caller who has a house payment of $1300 each month discovers that they can rent in their own (or a similar) neighborhood for about $1000 per month. They then can consider two options if they qualify for Chapter 7 Bankruptcy and decide to go that route and get out of their current Mortgage.

First, they can move "down the block," and save that extra $300 each month. If they put that extra $300 away for just 4 years, they will have socked away over $14,000 for a down payment on a new house! If they are coming up short each month, then that extra $300 in their pockets sure won't do them any harm.

Second, and while certainly not the best financial move, that person could, instead of renting "down the block" and saving $300 each month, use the whole $1300 for rent in a better neighborhood. Anyone who's been following home prices in Michigan, or even just in their own neighborhood, already knows that there's a good chance that, given the record drop in home values we've suffered here, the caller (and pretty much anyone else paying on a Mortgage) could move into a better neighborhood for that same amount.

I think the better choice would be to rent for less in their own, or a similar neighborhood ("down the block") and either use the extra $300 to live on, or to put away for a down payment on a new home. Getting a new Mortgage after Bankruptcy isn't a big deal. People do it all the time. I recently asked my own Mortgage Broker about this. He's been in the real-estate business his whole professional life. He told me that under the current (post real-estate crash, credit-meltdown) guidelines for writing new Mortgages, a person with a Bankruptcy on their record has to wait 3 years (it used to be 2 years before the mortgage meltdown; watch out for anyone saying that you only need to wait 2 years because they're unaware of the new rules) in order to qualify for a regular-interest-rate, conventional Mortgage.

Finally, let's look at one more, but far less common situation: A person calls who, at the end of the month, after they pay their living expenses, doesn't have any, or at least very much, money left over. Say that person, in a family or household of 4, has seen a drop in income due to a cut in hours at work. Now, assume that when they bought their home, they were making better money. Let's say that they were able, a number of years ago, to afford a $2400 per month house payment. Given their current income and the drop in property values, paying this note is a hardship that keeps them cash-strapped every month.

That caller wants to get out of their Mortgage and walk away owing nothing. But when we take into account that under the Bankruptcy Rules (which use the IRS standards), a family of 4 in Macomb County, for example, is allowed only $1636 per month for housing, we suddenly realize that even if they rent a place for $1700 per month, they start off with an extra $700 left over. If they can't "eat up" that money in their other expenses (and you can't just make them up; they're governed by all sorts of rules and limitations), they'll have too much money left over to qualify for Chapter 7 Bankruptcy.

Their only alternative is to file what's called a Chapter 13 Bankruptcy, which involves repaying a percentage of their debt (somewhere between 25% to 100%, depending on how much money they have left over after deducting allowable monthly expenses), over a period of 3 to 5 years. For a brief description of the difference between Chapter 7 and Chapter 13 Bankruptcy, scroll down on the FAQ page of my website.

My office does not handle Chapter 13 cases, primarily because they're long, and difficult, and too few actually work out all the way to completion. When I determine someone does not qualify to "walk away" from their debt in a Chapter 7, I will make sure they understand why that's the case, and at least help the caller by making a referral to those colleagues of mine who are skilled at Chapter 13. Because my office doesn't file Chapter 13 cases, you can be darn sure that we'll examine every option to get the person qualified to "wipe out" their debt in a Chapter 7 before we conclude we can't help them.

Fortunately, as I noted, those calls are the exception rather than the rule. Most people I speak with only wish they had too much money left over at the end of the month.

Whatever anyone's particular situation, you get the idea that there are all kinds of scenarios where a person can find themselves in a position to realize that keeping a particular home is not a wise financial move.

If that person can qualify for Chapter 7 Bankruptcy, then they can dump the house, get out of the Mortgage, and get what is known as a "fresh start." If they can save a decent chunk of money each month by cutting their housing expense, in a few years they'll likely have enough for a down payment and can get a new Mortgage. If they can't save any, or much money, even by lowering their monthly housing expense, then it just goes to prove that the house was costing too much based upon their income.

In other article I've detailed why I dislike and advise against most debt consolidation, elimination and management plans. Candidly, I think most of them are pushed by hucksters. As far as any "plan" goes, however, I like this one the best because it manages the debt in the simplest possible way - it completely gets rid of it!

Moreover, it puts a person's money where it belongs most - in their pocket!

If there's a larger point to this series, it's that anyone who has these considerations should take the time to examine all of their options. If, as part of that inquiry, a person ever feels pressured by someone they're speaking with, then I think they should end the conversation quickly and move on. In my office, we can't even know if we can help someone until we examine their situation, which we do over the phone. I expect that anyone who calls my office will want to continue to learn about and look at their options, and/or may just want to "think about it" before deciding to make an appointment. As I note on the homepage of my web site, anyone trying to "hook" someone in to an office appointment before they even know if, or how they can help them, seems way too eager to get them in the "client chair." Personally, whenever I feel pressure like that, I run the other way.

Above everything else, anyone dealing with these issues should take the time to learn as much as they can about their options. If getting out of debt is part of that consideration, they should speak with as many Bankruptcy Attorneys as they can. They should call around until they find someone they like, with whom they feel comfortable, and whose fees are reasonable. In my office, a Chapter 7 Bankruptcy costs a grand total of $1400: $1101 for the legal fee, plus the Federal Court Filing Fee of $299. My payment plan can be found by clicking on the link to my web site.

Of course, as part of that calling around, I hope a person looking for help contacts my office as well. That can be done either by phone or e-mail. If someone chooses to contact us by e-mail, they don't even have to leave a phone number. If they don't contact my office, well, then they don't. Even so, I sincerely hope that anyone with these considerations will do their homework. It's not fun, it is time-consuming, but it's also necessary. Only with a clear understanding of their situation can they determine what their options are, and which of those is best for them.