Early in this decade home foreclosure was a raging epidemic. With the improving economy, the foreclosure epidemic went away… or did it? In 2016 one in 2505 mortgages in Kentucky was in foreclosure, and one in 1036 mortgages in Indiana was in foreclosure. On March 4, 2017 Zillow listed 5037 foreclosed Kentucky homes and 9685 foreclosed Indiana homes for sale. In the first quarter of 2016 70% of loans in foreclosure were originated prior to 2009 even though these loans accounted for only 30% of outstanding loans.
As of February 2017, the first mortgage default rate nationwide was 0.72% (7.2 loans per 1000), and the second mortgage default rate nationwide was 0.48% (4.8 loans per 1000). The trend for both first and second mortgage defaults increased from fall 2016 according to the S&P/Experian indices.
While there may be a lower percentage of defaults compared to the height of the recession, the statistics above clearly show that many residents of Kentucky and Indiana are facing the prospect of losing their homes. The sad fact is that many of these folks will lose their home unnecessarily.
When people fall behind on their mortgage payments, either first or second mortgage, they suffer a feeling of helplessness. Since they did not have sufficient income to meet their obligations, they often feel that there is no way to ever catch up. However, the Bankruptcy Code provides a potential source of relief for those who are facing a possible foreclosure.
Chapter 13 of the Bankruptcy Code allows persons who are behind on their mortgage to place the amount they are behind in a plan to repay their debts over a period of 36 to 60 months. And, if they have a second mortgage but no equity in their home, the second mortgage can be “stripped off” and treated as any other debt.
Regular mortgage payments are made outside the Chapter 13 plan. If the person fails to make the required payments, the mortgage holder may ask the court to allow it to move forward with foreclosure.
Suppose a person has a $200,000 first mortgage, but the home is only worth $275,000. Suppose also this person has a second mortgage of $50,000. Since there is no equity in the home to secure the second mortgage, it can be stripped off and treated as any other unsecured debt. These debt are paid back at less than 100%, sometimes much less, and when the Chapter 13 plan is completed and the court enters the discharge order, the second mortgage is erased. But, if the person fails to complete the plan payments and the case is dismissed, the second mortgage is not stripped off.
As of February 2017, the first mortgage default rate nationwide was 0.72% (7.2 loans per 1000), and the second mortgage default rate nationwide was 0.48% (4.8 loans per 1000). The trend for both first and second mortgage defaults increased from fall 2016 according to the S&P/Experian indices.
While there may be a lower percentage of defaults compared to the height of the recession, the statistics above clearly show that many residents of Kentucky and Indiana are facing the prospect of losing their homes. The sad fact is that many of these folks will lose their home unnecessarily.
When people fall behind on their mortgage payments, either first or second mortgage, they suffer a feeling of helplessness. Since they did not have sufficient income to meet their obligations, they often feel that there is no way to ever catch up. However, the Bankruptcy Code provides a potential source of relief for those who are facing a possible foreclosure.
Chapter 13 of the Bankruptcy Code allows persons who are behind on their mortgage to place the amount they are behind in a plan to repay their debts over a period of 36 to 60 months. And, if they have a second mortgage but no equity in their home, the second mortgage can be “stripped off” and treated as any other debt.
Regular mortgage payments are made outside the Chapter 13 plan. If the person fails to make the required payments, the mortgage holder may ask the court to allow it to move forward with foreclosure.
Suppose a person has a $200,000 first mortgage, but the home is only worth $275,000. Suppose also this person has a second mortgage of $50,000. Since there is no equity in the home to secure the second mortgage, it can be stripped off and treated as any other unsecured debt. These debt are paid back at less than 100%, sometimes much less, and when the Chapter 13 plan is completed and the court enters the discharge order, the second mortgage is erased. But, if the person fails to complete the plan payments and the case is dismissed, the second mortgage is not stripped off.
Stripping off the second mortgage only works when there is no equity in the home to secure the second mortgage. For example, if a home has a first mortgage of $200,000 and a value of $300,000 with a second mortgage of $75,000, then there is $100,000 to secure the second mortgage. But, if the first and second mortgages exceed $300,000, the second mortgage can still be stripped off.
A person facing foreclosure needs to consider whether she can afford to keep the home. If it it is a tight financial situation, then perhaps Chapter 13 is not the best choice. An experienced bankruptcy attorney can certainly provide guidance in this regard.
A person facing foreclosure needs to consider whether she can afford to keep the home. If it it is a tight financial situation, then perhaps Chapter 13 is not the best choice. An experienced bankruptcy attorney can certainly provide guidance in this regard.
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