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Bankruptcy, Home Ownership, and Lasting Protections


Many people file bankruptcy because they’re behind on mortgage payments and need the protection of the Automatic Stay. Regardless of the amount of delinquency, and even if the foreclosure sale is scheduled for later that day, Section 362 of the Bankruptcy Code stops foreclosure in its tracks.

The Automatic Stay is only part of the protection available to homeowners. A good Chicago bankruptcy lawyer uses obscure legal doctrines to make your house more affordable in the long term. Without such long-term protections, there’s a good chance the debtor may file bankruptcy again in a few years. That’s an outcome everyone wants to avoid.

Payment Term Renegotiation

The Bankruptcy Code does more than stop creditor adverse actions, such as foreclosure and repossession. It also wipes out all existing credit, loan, and repayment agreements. These agreements must be completely redone, if the debtor wants to retain the property, such as a house, or the service, such as internet service.

Usually, creditors immediately send boilerplate reaffirmation agreements to debtors in these situations. Or rather, they send them to the debtor’s Chicago bankruptcy lawyer, since the Automatic Stay prohibits contact between debtors and creditors. Often, lawyers advise clients to sign these agreements as is.

These lawyers miss an excellent opportunity to renegotiate the interest rate and other critical payment terms. In bankruptcy, almost all financial terms are negotiable. A slight interest rate reduction could save your family thousands of dollars a year.

If the bank refuses to negotiate, the judge usually refers the matter to mediation. During this court-supervised negotiation session, both sides have a duty to negotiate in good faith. So, banks cannot make the “take it or leave it” offers they usually make in these situations. Instead, the bank must compromise on issues like the interest rate, if that’s what it takes to make a deal and avoid a hearing on the issue.

Further relief, such as partial UPB (unpaid principal balance) reduction may be available, especially if there’s any evidence of mortgage or other fraud. The evidence doesn’t have to be strong enough to win a court case. It just needs to be strong enough to create negotiating leverage.

Lien Stripping

In many cases, the judge could reclassify a secured debt as an unsecured debt. If that happens to a junior lien or HELOC (home equity line of credit), the judge will discharge that loan, meaning the debtor doesn’t have to repay it.

Assume Michael used an 80/20 mortgage to buy a $200,000 house. That house’s appraised value is now $150,000.

Incidentally, the actual fair market value of a home is usually different from the value listed on a tax appraiser’s website. Attorneys usually partner with real estate agents to determine the actual FMV of a property.

Anyway, Michael’s 80 percent mortgage is $160,000 and his 20 percent mortgage is $40,000. If his home’s value has dropped $50,000, the value isn’t large enough to secure both loans. Therefore, the junior lien is now a dischargeable unsecured debt. Part of the senior lien is unsecured as well.

Count on a Hard-Working Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a confidential consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters throughout the Prairie State.

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