Yesterday’s post talked about the Arizona homestead exemption and how it works to protect some of the equity that you may have in your house. However, in this market, that has not really been the prime concern for most of my clients. Only rarely do my clients actually have equity in their homes – instead 9.9 out of 10 of my clients find that their home is ‘upside down’ – that they owe more on the mortgage or mortgages that are connected to the house than the house is worth.
This, in and of itself, does not mean that you will lose your house in the bankruptcy. Let’s take a quick break and talk terminology for a minute… “Losing your house” – yes that does in fact mean that you will have to move out of your home and find a new place to live. However, the flip side to surrendering your house in the bankruptcy (this is the legal terminology for ‘losing your home’ so to speak) is that you also lose the mortgages that are associated with it….. If you surrender your house in your bankruptcy, this debt will be part of the discharged debt. So, while it is hard to come to terms with the fact that your home may not be your home any more when all is said and done, it helps to keep in mind the big picture: No more 200, 300, 400 thousand dollar mortgage, no more insane house payment.
Unfortunately, the bottom line often is, if you cannot make ends meet to make your monthly mortgage payments, then you probably should surrender your home. Remember, the goal of this whole thing is to make your life more enjoyable, give you a fresh start. Continuing to struggle to make your monthly mortgage payments will certainly hamper that fresh start.
But I digress… the topic is whether you can keep your house if you file for bankruptcy in Arizona? The answer, unfortunately, is it depends. Aside from whether it is financially smart to keep the house, it depends on whether you are current with your mortgage payments on the date of filing. If you are filing a Chapter 7 bankruptcy, you must be current with your mortgage payments, and remain current, on the date you file, and afterwards in order to keep the home. It is an often repeated fallacy that a bankruptcy will stop a foreclosure. That is the vernacular, but the more correct way of stating this is that a Chapter 7 bankruptcy will postpone your foreclosure, if you have one scheduled already. It will not prevent it. If you are not current with your mortgage payments, you will most likely not be able to ‘save’ your house in the bankruptcy. (I say most likely, because there is always the theoretical possibility of the bank agreeing to a modification…. but from my experience that hasn’t been really been working out for too many people – whether outside a bankruptcy or after filing.
Chapter 13 is a way to ‘save’ your house even though you are behind on the date of filing. In order for that to work, your income going forward must be sufficient to allow you to make your regular monthly mortgage payment in addition to the Chapter 13 plan payment, which in turn must be sufficient to catch up your arrearage over the next 3 – 5 years.
This is really it in a nutshell. When discussing these options with my clients, I always make sure of two things: (1) what is their reality – are they in a position now where they can afford the house they live in; and (2) does it make financial sense to keep the house and the mortgage attached to it.
Note, this post deals mostly with first mortgages – another blog post discussing the impact of second mortgages will be coming soon!
If you are falling behind on your mortgage, or you think you may be soon – please give us a call and I’d be happy to discuss YOUR specific situation with you. You can find all of our contact information on our website www.marcowimmerlaw.com.