Managing your Home Mortgage Debt- Last Resorts
As we discussed in a previous article, home mortgage debt remains a significant burden for homeowners. As wages have remained steady despite inflation, and those going back to work are finding only lower wage jobs, maintaining home mortgage payments set up 6 or 8 years ago is difficult. Working with mortgage lenders, the federal government has set up relief programs to help some distressed owners. Unfortunately, millions of homeowners are not eligible for these programs, or will get caught up in the red tape of dealing with large, multi-national banks that are not properly staffed to assist distressed homeowners. Some borrowers find that the debt is insurmountable. For those at the end of their rope and about to give up hope of keeping their home, we offer some last resort options to consider
If you’ve given up on keeping your home and it won’t sell on the open market for enough to pay off the home mortgage debt, then a short sale may be an option available if the bank will work with you. In a short sale, the mortgage lender agrees to accept an amount less than the balance of the debt as a payoff, releasing the mortgage, obsolving the borrower of further liability, and letting the home go to a new owner. The mortgage lender first has to accept the idea that you cannot pay your mortgage. It will require you to submit bank statements, tax returns, pay stubs, and other evidence of income and assets. Then the bank has to conclude that the home cannot sell on the open market for enough money to pay off the mortgage. The bank will require an appraisal (which you pay for).
Then comes the tough part. The bank will determine how much money they will accept. There may be other liens on the property like a second mortgage, tax debt, materialman’s lien, homeowners association lien. All of these creditors will want a share of the payment. It will take an expert to negotiate payoffs with all of these creditors and keep them organized. This is all assuming one can find a buyer.
This option can stretch a 30-day closing process into 90 days, and try the patience of the most dedicated soul. But the result for the former homeowner is a “less bad” hit to your credit rating. You will be able to recover from this damage to your credit history much sooner than a foreclosure. The borrower may also face additional tax liability. So speak to your accountant before you sign any agreements.
As we noted in a previous article, most cases of Chapter 7 bankruptcy result in surrender of the debtor’s home to the mortgage lender. But this is not always the case. In a Chapter 13 bankruptcy, a debtor can repay the arrearage (past due payments) over a period of time as long as they can maintain the current mortgage and tax payments. And in a Chapter 7, if the homeowner can show sufficient into to make some sort of mortgage payment, and there is no arrearage (or it can be immediately paid off), the bank may be willing to enter into a reaffirmation agreement, revising the terms of the mortgage and allowing the debtor to continue to own the home after the bankruptcy case is concluded.
These are last resorts and tough choices. Homeowners should consult with the appropriate professionals like real estate brokers, lawyers, and accountants before taking these steps.