For six months at the Salinas Californian I’ve been giving advice about putting your credit cards aside, living within a budget, starting an automatic savings plan, getting medical insurance, and other tips for avoiding financial difficulty. I’m the only bankruptcy lawyer you’ll ever hear with advice about how to avoid filing for bankruptcy. All very important tips. But today I want to talk about what can be your biggest problem: your house.
Folks can talk rationally about credit card and medical bills, student loans, even those dreaded pay-day loans, but it’s hard to really talk rationally about home ownership. Most people love their houses, and have grown up cherishing the concept of home ownership. But occasionally your mortgage can become a monster. Blindly refusing to consider an alternative to home ownership can be hand-cuffing yourself to the “Titanic.”
If your mortgage payment has become a burden, either because your income has fallen, you have an adjustable mortgage with an increased payment, or your living expenses have risen, take action quickly. First, consider applying for a home loan modification. While the government’s Home Affordable Modification Program has expired, most lenders still have formal loan modification programs in place. I have seen many more of these applications approved lately than in previous years. Principal reductions of five and even six figures are not uncommon. Not only can you reduce your payment, if you are behind you can apply to roll your arrearage back into the principal.
Even if you wind up having to file bankruptcy you can still achieve a huge savings through such a modification. Keep in mind, however, that such applications involve paperwork that can lead to frustration and there is no guarantee of success.
On the good side, such modification programs are free and you can apply yourself. Beware of those who would charge you a fee to take you through the process—many people have been victimized by scams.
If your modification application is unsuccessful, you need to take a long clear look at your house situation. Is your mortgage more than your house is worth—that is, are you under water? By how much? With your income and other expenses, how easily can you make the present mortgage payment? If making the mortgage every month will require heavy lifting on your part, are you prepared to make every payment for the years it will take for your home value to increase to where you again have an equity?
It may be in your interest to pursue a short-sale of your house, where your mortgage lender would agree to a sale where it would accept less than the full amount owed. This can avoid a foreclosure and get you out from under on the mortgage. But, as with loan modifications, short sales can be frustrating and you are likely to end up with little or no cash at closing. Be sure you use a real estate agent with a proven record of successful short sales. And speak to your accountant—even if the loan is retired there may still be an income tax consequence.
Finally, if you have only one loan on your house, it may be possible to just walk away and let the bank take back the house. California law ordinarily protects a homeowner from any personal liability on a foreclosed first mortgage. But this protection does not automatically protect you from a second mortgage or home equity loan–even if the house is gone you could still be sued.
Whether you are a candidate for bankruptcy or not, it is always wise to consult a bankruptcy or real estate lawyer before taking any final action. Be sure your house loan or loans do not contain a hidden trap!
In future months I look forward to bringing you more tips to help you avoid money problems and achieve power over your finances. There are plenty of folks in bankruptcy court. You don’t need to be one of them.