Orlando homeowners are struggling to hold on to their homes. In this market, maintaining homeownership is a challenge, particularly for homeowners who took second mortgage loans that were doled out like candy by banks during the real estate bubble. Many Orlando homeowners have already lost their homes in foreclosure; many are in foreclosure and fighting to hold on to their homes with promises from their banks of mortgage modification; and others are facing the prospect of a foreclosure on the horizon, as banks gear up for for new foreclosures after a temporary reprieve after being exposed for their unethical and illegal practices.
What homeowners need to know is that if the balance on their first mortgage loan exceeds the fair market value of their home, it is likely that the second mortgage on their homes can be eliminated entirely in bankruptcy court. The procedure is known as “lien stripping,” and it is available to homeowners who seek protection in the bankruptcy court under chapter 13 of the bankruptcy code. The procedure offers a enormous benefit to the home owner whose home value is below the amount of the first mortgage debt. By showing the bankruptcy court that there is no home equity to support the second mortgage, the second mortgage lender looses it’s rights as a secured creditor, including the right to foreclose on the mortgage. The debt is then reclassified as unsecured debt and is treated by the bankruptcy court as an unsecured debt, like the balance on a credit card. Depending on the homeowners’ income and expenses, some or even all of this debt will be discharged after the final payment on a chapter 13 plan.
Even for homeowners whose loan balance is substantially lower than the value of the property, working with a bankruptcy lawyer in a chapter 13 plan may offer the best hope of a loan modification. A new mediation program in chapter 13 bankruptcy court has been offering promising results to home owners who are financially able to make monthly mortgage payments on a steady basis in a chapter 13 plan. I, and other bankruptcy lawyers, have written about the favorable results that homeowners have been experiencing in this program. Unfortunately, Congress has not provided the remedy of loan balance “cram downs” on the first mortgage loans for home owners, even though that relief is available to owners of investment property, as I have written about in a recent blog post.
Chapter 13 relief is available for homeowners who are in default, who are behind in their payments, and even those who are in foreclosure. A chapter 13 proceeding may be commenced and homeownership preserved as long as a foreclosure sale is not yet complete.
Of course, a chapter 13 plan may not be suitable for every Orlando homeowner. A successful chapter 13 plan depends on a homeowner having a steady source of income to make monthly payments without defaulting. If your financial crisis has been temporary, and your prospects are improving, chapter 13 is ideal for playing catch up, and restructuring debt to facilitate homeownership.