Can Bankruptcy Preserve Home Ownership?
Because of the COVID-19 pandemic, FHA mortgage delinquency rates recently hit an all-time high. Observers do not expect delinquency rates to decrease significantly until at least the spring of 2022. As a result, as coronavirus financial protections end, many people will need to take measures to save their homes against banks which are eager for money.
These creditors are likely to be even more aggressive than ever before in 2021. In many states, lenders can begin foreclosure proceedings after just one missed payment. Because the Supreme Court has recently watered down some protections in the Fair Debt Collection Practices Act, that may become the majority rule very soon.
Bankruptcy, and especially Chapter 13 bankruptcy, is the best way for distressed homeowners to stay in their homes. As a bonus, bankruptcy does more than stop foreclosure proceedings. It also makes homes more affordable, at least in many cases, so home ownership becomes more sustainable.
Automatic Stay Issues
Simply filing the bankruptcy petition does not automatically stop foreclosure. The parties handling the foreclosure, which is normally the loan servicing company and the local county sheriff, must receive actual notice via the creditor matrix. If foreclosure is imminent, best practices dictate direct notice as well.
Buying and selling mortgage-backed securities (MBS) is not as common today as it was before the 2008 financial crisis. But it still happens. As a result, the homeowner might not know the current servicing company’s identity, even though the servicer is legally required to divulge this information.
So, when preparing the matrix, do not exclusively rely on the information the debtor provides. Check the county deed records as well. Then, if things go sideways, you can at least prove you did your due diligence.
The local sheriff is usually not part of the paperwork until the foreclosure sale itself. So, review the foreclosure sale notice, if the client provided it, and deliver notice, including the bankruptcy case number, to the person in charge of the sale.
Maximizing the Homestead Exemption
Georgia’s homestead exemption is rather limited. Single filers can exempt up to $21,500. If the client has lived in the home for more than ten years, the equity amount probably exceeds that ceiling. To maximize the exemption and therefore keep the trustee from seizing it, it’s important to understand the difference between fair market value and bankruptcy value.
Assume Duane has $40,000 of equity in a home worth $200,000, according to the tax assessor’s website. According to those figures, which do not account for the fact that the house needs substantial foundation work, the trustee is free to sell Duane’s home, pay off his $21,500 equity exemption, and distribute the remaining proceeds to creditors.
But not so fast. The COVID-19 pandemic has depressed the real estate markets in many places, driving already low home investor offers even lower. And these are the offers that matter in this context. Schedule A requires debtors to list the as-is cash value of a particular asset.
So, at least one home investor’s written offer for Duane’s $200,000 house would be as low as $50,000. After the trustee pays the equity exemption and bears all other costs, mostly the cost of repairs, there might be almost nothing to distribute to creditors. According to the Bankruptcy Code, that fact makes Duane’s house untouchable.
Bankruptcy Affordability Options
These same valuation principles apply to some advanced bankruptcy options which a Georgia bankruptcy lawyer can unlock. If these options apply, the homeowner could save a considerable amount of money.
Lien stripping is a good example. This option is usually available if the homeowner used 80/20 financing to buy the home and the home’s value has decreased at least 20 percent. In that situation, the house’s value is not high enough to secure both liens. Therefore, the junior lien is an unsecured debt which is subject to discharge.
Other options, which are often available if the UPB (unpaid principal balance) of the loan is below $20,000, include a cram-down. If the homeowner makes accelerated payments and remits the home’s current fair market value to the lender, the bank might have to forgive the rest of the loan.