I’m often asked by a prospective client about whether they will be able to keep their home if they file chapter 7 bankruptcy. My typical “lawyer” answer is, “it depends”. Let me tell you about some of my clients. I’ll call my clients Stuart and Naomi, (not their real names).
Stuart and Naomi have one son in college. They bought their home in 2006 near the height of the real estate boom Neither Stuart or Naomi believed (after all, the real estate agent told them that Real Estate values never go down). They were significantly upside down (they owed almost twice what the house was worth).
The real problem was that Naomi was diagnosed with stage 4 cancer and she lost her job. Without long-term disability to cover her lost income there was not enough money to pay the mortgage and their credit cards.
Naomi and Stuart went to two different loan modification companies and were told that within 45 days their mortgage would be cut in half… when it didn’t happen, the first company told them to stop paying their mortgage or else the bank would not consider a modification. All they got was being behind on their mortgage about $30,000 and having medical bills and credit card debt of over $450,000.
Stuart and Naomi called for a consultation, and after much deliberation decided to file Chapter 7… they just felt that they could not make what we estimated would be their Chapter 13 plan payment for the next several years.
They were told that they might not be able to keep their house. While they wanted to keep the house, it was more important to get a discharge from their credit card and medical debts. I told them that the problem was in a chapter 7, their lender may require them to pay all the back payment up front before they would consider letting them stay in the house.
Stuart and Naomi obtained a discharge of the medical and credit card debts about seven months after filing for bankruptcy. Since they did not have to make the payments that they would have had to make without the discharge, their bank considered them for a modification. The new payment was reduced based on the fact that the house was not worth what it had been, and the bank would lose almost everything if they did not modify the mortgage. The bank lowered the payment to about 45% of their former payment, changed the loan from a 30 year loan to a 40 year loan, and also set up a non-interest bearing balloon payment instead of a principal reduction.
Overall, Stuart and Naomi would not have been able to keep their home had they not filed for bankruptcy, and they would not have been able to get a modification because of their credit card and medical debts.