Bankruptcy Loopholes That Protect Your Home

Home protection is a key priority for many bankruptcy debtors. Many debtors file Chapter 7 or Chapter 13 to take advantage of bankruptcy’s Automatic Stay and stop home foreclosure. A pair of loopholes buried deep within the Bankruptcy Code may also apply in consumer bankruptcy cases. These loopholes often make a home more affordable after bankruptcy protection ends, reducing the risk of a future financial crisis.

Amateur do-it-yourself filers often overlook such obscure loopholes. So do para-professional bankruptcy petition preparers. Only an experienced Chicago bankruptcy lawyer knows about such loopholes. More importantly, an attorney knows how to make obscure points of law work for people like you. The following long-term home affordability provisions are available in both Chapter 7 and Chapter 13 matters.

Cram Down

The redemption option (a cram down) is usually based on a home’s fair market value. A home’s tax appraisal value goes up almost every year, so the taxing authority gets more money. But a home’s fair market value could go up or down, and these swings could be drastic.

If a home’s fair market value is significantly lower at the time of filing, a redemption/cram down might be an option. Such timing matters underscore the importance of partnering with a Chicago bankruptcy lawyer and filing a voluntary petition at the opportune time, not just any time.

Bankruptcy’s redemption option allows the debtor to “redeem” the collateral at the current fair market value price. Redemptions are more common with regard to automobiles. The value of these assets usually drops like a rock. The redemption option is available for other assets as well, including homes.

Assume Jeff files bankruptcy during a seller’s market, when many sellers discount homes. Additionally, Jeff’s older home doesn’t draw much interest from buyers and needs some foundation work. As a result, the fair market value of his $200,000 home has plummeted to $150,000.

If Jeff pays the bank the full FMV by the time the judge closes the bankruptcy, the bank must tear up the note and eat the remaining $50,000. That change could save Jeff thousands of dollars a year. Most likely, Jeff doesn’t have $150,000 in his bank account. If he did, he probably wouldn’t have filed bankruptcy. But Jeff’s Chicago bankruptcy lawyer can help him find a lender who will refinance the note, even though Jeff is in bankruptcy.

Strip-Off

Lien stripping takes advantage of a fundamental bankruptcy principle. Unsecured debts, such as credit cards and medical bills, are usually dischargeable. In some cases, a HELOC or other junior lien could be an unsecured debt.

Let’s go back to Jeff’s house and change the facts a bit. Assume Jeff still owes $150,000 on the original note. He also took out a $50,000 HELOC. The home value isn’t high enough to secure both obligations. Therefore, a bankruptcy judge could reclassify the HELOC as an unsecured debt. Once again, Jeff could save tens of thousands of dollars.

The 80/20 mortgage is another common scenario. If the home’s fair market value is too low to fully secure both the senior and junior lien, all or part of the junior lien, and maybe part of the senior lien as well, is an unsecured debt.

Rely on a Detail-Oriented 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. Our main office is conveniently located near Union Station.

Source:

govinfo.gov/content/pkg/USCODE-2011-title11/html/USCODE-2011-title11.htm