The first few questions he lists are:

• Have you previously filed bankruptcy? If so when?
• Why are you filing bankruptcy?
• Did you review the bankruptcy petition? Is the information correct?
• Are there any corrections that need to be made?
• Did you list all income, assets, and debts?

The questions pertain to both Chapter 7 bankruptcy and Chapter 13 bankruptcy. To see the rest of the list and some other useful information, see the original post here.

That debt was never in my name, so I’m not responsible for it.

The general rule is that debt incurred solely by one individual is the responsibility of only that person. However, Colorado law creates an exception known as the Family Purpose Doctrine or  Family Use Doctrine which can make a spouse or family member liable even if they never authorized the debt. Colorado Revised Statute 14-6-110 states:

The expenses of the family and the education of the children are chargeable upon the property of both husband and wife, or either of them, and in relation thereto they may be sued jointly or separately.

This means that either the husband or wife can be sued on debts incurred by another family member as long as the item or service purchased was for and used by the family.  Whether the Family Purpose Doctrine makes you responsible for any particular debt will depend on the facts of your case, however it is incorrect to assume that just because you didn’t sign off on that purchase you can’t be sued for it.

My ex took that debt in the divorce, so I’m not responsible for it.

One of the most common misconceptions about divorce is that the assignment of debt to one party releases the other of any responsibility to pay. This is not true – the divorce is a legal order that is binding on you and your ex, but not your creditors.   When one spouse takes on – or assumes – a debt, he or she promises to pay that debt and indemnify (protect) the other spouse from any collection activities by the creditor. The spouse that didn’t assume the debt is still responsible for it, but as long as it’s being paid by the ex, the non-assuming party doesn’t really notice it. The problems generally start when the ex stops paying. Let’s use an example to clarify:

Adam and Jenny buy a home with a mortgage from Blackacre Bank. After several years, Adam and Jenny split up and in the divorce Adam agrees to keep the home and assume the mortgage debt. However, Adam doesn’t refinance the mortgage in his name alone, and Jenny doesn’t quitclaim (surrender) her ownership interest in the home to Adam. Adam pays the mortgage for 5 months after the divorce and Jenny doesn’t hear a thing from Blackacre, so she assumes that she’s off the hook for the debt. Unfortunately, Adam loses his job and can no longer afford to pay the mortgage. This is when Jenny starts getting collection calls from Blackacre Bank. “But Adam took the debt in the divorce,” she tries to explain to the bank. It doesn’t do any good. The bank continues to call, the house is foreclosed upon, and eventually Jenny is sued on the note. Jenny eventually elects to wipe out the debt in a chapter 7 bankruptcy.

In this example, the bank was well within it’s rights to come after Jenny regardless of what the divorce said about the home and mortgage. So what could Jenny have done to protect herself? First, Adam and Jenny make a very common mistake among people who either represent themselves in a divorce or who hire divorce lawyers who don’t understand debt law – they didn’t refinance the loan. Had Adam refinanced in his own name, Jenny would have been off the hook for the debt. A refinance isn’t always available, though, especially if the home doesn’t have any equity.

Jenny’s other option would be to hold Adam responsible under the terms of the divorce decree. Adam agreed to protect Jenny from the Bank’s collection activities. When he stopped paying, Jenny could have sought an order from the divorce court compelling Adam to fulfill his responsibility. This is somewhat impractical and ineffective as well, because a court order to pay doesn’t change the fact that he can’t afford to do so.  While this example uses mortgage debt, the same is true for credit cards and other forms of debt

I included that debt in a chapter 7 bankruptcy filed after the divorce, so I’m no longer responsible for it.

This is half true. While the debt that you owe has been discharged as to the creditor, you’re probably still responsible for indemnifying your ex. Bankruptcy Code Section 523(a)(15), states that debts “ to a spouse, former spouse, or child of the debtor . . . incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court” are non-dischargeable in a Chapter 7 bankruptcy.

Let’s go back to our example of Adam and Jenny to clarify. If, after losing his job, Adam filed a Chapter 7, Blackacre Bank would no longer be able to collect the debt from him. However, his obligation to protect Jenny from Blackacre survives. If Jenny informs herself and asserts her rights under the Bankruptcy Code, the divorce court can find him in contempt and he can be subjected to other penalties. Even though he might not have the ability to pay now, if Jenny’s persistent this obligation will hang over Adam’s head for years.

While chapter 7 bankruptcy may leave Adam on the hook for his obligation to Jenny, Chapter 13 Bankruptcy does provide for the discharge of  assumed debt.

Break the Financial Bonds and Get On With Your Life.

Many of the problems arising out of debt and divorce are easier to avoid ahead of time than to resolve after the fact. Even though you may be on solid ground financially now, it’s impossible to know what will happen in the future and how your ex will react. Bankruptcy is among the best tools to break the bonds that hold people together and drag them down long after a divorce is finalized. Contact an experienced debt relief and bankruptcy attorney as part of the separation process to avoid the unpleasant surprises like those experienced by Adam and Jenny.

Short sales are placed into two categories – those which result in a deficiency, and those that do not. A deficiency occurs when the lender does not agree to forgive the difference between what the home sells for in the short sale and what you owe on the debt. As is clear from the following chart, if your short sale leaves a deficiency it’s impact on your credit and your recovery is the same as a foreclosure.

Given that the effect on credit is comparable, an valuable alternative to a short sale is foreclosure with a strategically filed chapter 7 bankruptcy. If done by an experienced bankruptcy lawyer, this technique can result in families remaining in their homes for a year or more after making the last mortgage payment and walking away with a fresh start.

If you’re underwater on your home, schedule a free consultation with a debt relief attorney to learn about all of your options and not just those that benefit the mortgage company or the realtor trying to sell you a short sale.

Do I make too much money to qualify for chapter 7 bankruptcy?

In researching about filing for chapter 7 bankruptcy, you may have learned that you have to qualify under the bankruptcy means test. Additionally, you may have learned that the chapter 7 means test uses your income as a factor. You might have found that you make more than the median income of  your state , or you may have even been told by a lawyer that you make too much money for chapter 7 bankruptcy after a cursory discussion. While a chapter 13 bankruptcy has some benefits not found in a chapter 7, you shouldn’t be one of these people who gives up on filing a chapter 7 too soon. Read on to learn more about how the means test works and why you shouldn’t stop at income.

What is the Means Test?

The bankruptcy means test is the tool which sorts filers into two categories – those who are eligible to file chapter 7 bankruptcy, and those who are not. Congress intends for those people who can afford to repay a portion of their debts to do so in a chapter 13 bankruptcy, while those who can not afford to repay discharge their debts immediately in a chapter 7. The first factors in whether you qualify do not involve income, though. For example, you may be eligible to file bankruptcy regardless of your income if your debts are primarily non-consumer. That is , if the majority of your debts are business related you skip the rest of your means test. Additionally, disabled veterans and reservists and National Guard Members whose debts were incurred while on active duty can opt out of the means test as well.

What is Median Income and Why Does it Matter?

Now comes the part of the means test where income becomes important. The process of dividing those who must repay from those who don’t begins with the median income. The median income figures change periodically, and can be looked up here (choose the correct date, hit GO, then select the link Median Family Income Based on State/Territory and Family Size). If you make less than the median income in your state for your household size, congratulations, you are presumed to qualify for chapter 7 bankruptcy. The calculation of your income for the purposes of means testing is more complicated than this, so you’ll want to speak to an experienced bankruptcy lawyer to verify what you’ve found. If your household income is higher than the number you see reported, don’t stop here because the means test doesn’t!

What if I Make More Than the Media Income?

Once it’s been determined that you make more than the median income the means test determines whether, after expenses are paid, you would have any money left over to contribute to a chapter 13 repayment plan. House payments, car payments, child support and alimony, and other expenses get factored in here and can go a long way toward pushing you into a chapter 7 bankruptcy. However, depending on how far above the median your income is, it may take a lot of work to adjust your expenses in such a way that you qualify.

Get Help, it’s Worth It

Some bankruptcy attorneys either don’t know how to maximize your qualified expenses or aren’t willing to spend the time to work with you on this, and as such may tell you that you don’t qualify for a chapter 7 bankruptcy without crunching the numbers first. If this is the case, you should seek a second opinion. Even if you’re still unable to qualify for a chapter 7 bankruptcy, any attorney who understands and uses all the tools at his disposal is going to be able to get you a better result in a chapter 13, possibly saving you thousands of dollars.

First, A Tough Decision

While there are several different ways to address a foreclosure, the first question you must ask yourself is whether it makes sense to keep the home.  As a result of the huge drop in home values, you may owe significantly more on your home than it’s worth. With some experts claiming that it may take as long as a decade for your home to regain its value, it may make the most sense to walk away from this bad investment and buy a new home once the market has stabilized.

You’ve Decided To Walk Away

In foreclosure, the lender has the right to sell your home at auction and sue you for the deficiency – the difference between what you owe on your mortgage and the actual sale price. The amount will likely be significantly larger than you expect, because the amount paid for the property at auction is regularly much less that what it would sell for normally. There is really only one good option to avoid being sued for a deficiency at this stage:

• Chapter 7 Bankruptcy – The collapse in the housing market has made bankruptcy the tool of choice for many who had never before considered it. Using a chapter 7 bankruptcy in conjunction with the foreclosure is often the best approach for three major reasons. First, chapter 7 will wipe out the deficiency and prevent you lender from suing you to collect it. Additionally, your credit cards, medical bills, and other debts can be wiped out at the same time, giving you a great opportunity at a fresh start.

Second, chapter 7 can dramatically increase the amount of time before you have to leave the property. A foreclosure sale generally occurs between 100-120 days after the process begins. If you hire an experienced attorney who understands how foreclosure and bankruptcy can work together for your benefit, the time before you have to leave your home can be doubled or tripled. Imagine saving the money you would otherwise be spending on rent for 4 – 6 months, and having plenty of time to find new accommodations.

Finally, if you’re going to let your house go, most people can qualify to buy a new home more quickly after a foreclosure in conjunction with a bankruptcy than most other forms of conveyance, including a short sale or deed in lieu of foreclosure. The post bankruptcy “seasoning” period can be as short as 2 years for an FHA loan, and just 1 year for a VA loan.

You’ve Decided To Keep Your Home –

If you have decided that it makes sense to keep your home and that you can afford to keep making payments, in Colorado you have several options after the foreclosure process has begun:

• Cure – You have the right to keep your home if you are able to cure the arrears. That means that you must get entirely caught up on all missed payments, plus any fees, prior to the foreclosure sale date. To take advantage of your right to cure, you must file a notice of intent to cure with the Public Trustee “no later than fifteen calendar days prior to the date of sale”, and pay the cure amount “[n]o later than 12 noon on the day before the sale”.

•  Redemption – If you are unable to cure, you have the right to redeem your property by paying the full foreclosure sale amount within 75 days of the sale.

•  Chapter 13 Bankruptcy – While the rights of cure and redemption require that you have a large amount of cash on hand, chapter 13 bankruptcy is a powerful tool which can allow you to both keep you home and, in some instances, dramatically reduce the amount you owe on it without making a huge upfront payment to your lenders. Chapter 13 will stop the foreclosure and allows you to get caught up on missed payments over a period of three to five years. Additionally you may qualify for what’s known as a Lien Strip. In a nutshell, if your home is worth less than the first mortgage, certain additional encumbrances like a second mortgage or line of equity secured by the property can be “stripped off” – that is, you’re no longer responsible for them. While bankruptcy is a time-consuming endeavor, the protections provided by the court often make it a smoother process that those listed above.

Remember that even though your home is in foreclosure, you still have good options. Contact an experienced foreclosure attorney as soon as possible to get achieve the best results.

• First, you need to decide whether you want to keep the house. If you owe far more on it than it’s worth, your interest rates are too high, or if it needs more work than you can afford to put into it, you might be better off letting it go in the bankruptcy and buying again in a few years. In Colorado, almost everyone who wants to keep their home and decides that it makes sense to do so is able to.

• Second, if you file for bankruptcy when you’re behind on the mortgage, your lender may either demand that you get caught up right away or ask the court for permission to start the foreclosure process. This creates some risk and is better not left to the discretion of the mortgager. If you’re behind it would be wise to talk to an experienced bankruptcy attorney to discuss either getting caught up on payments prior to filing the chapter 7, or to consider a chapter 13 bankruptcy which would allow you to repay arrears over a three or five year period.

• Finally, the bankruptcy trustee will be interested in whether you have any equity in the home. That is, is the house worth more than you owe on it? If so, do you have more equity than is protected under your state’s exemption statute (the law that determines what you get to keep in a bankruptcy)?  If you don’t have any non-exempt equity, the trustee is not going to be interested in your home. If you do have non-exempt equity, there are steps you can take to minimize it which should be discussed with a knowledgeable chapter 7 bankruptcy attorney in your area.

When considering whether to file for chapter 7 bankruptcy in Colorado, it’s important to remember that all of your dischargeable debts will be wiped out. This includes not just credit card and medical bills, but also the debt you owe on your car and your home. Even though you will no longer owe any money on your home, whether you keep it after filing bankruptcy is largely up to you. The three most common options for your house after bankruptcy are to reaffirm, “stay and pay”, or surrender.

• Reaffirm – Reaffirmation is a process in which someone who has filed bankruptcy asks the judge to waive the discharge of a particular debt.  With a mortgage or HELOC, you agree that you will continue to make your payments on the house, and that you continue to owe the debt.  As long as you continue to make payments, the lender can’t foreclose. However, if you become unable to pay, not only can the lender foreclose, but they can also sue you for the deficiency (the difference between what you owe on the home, including foreclosure costs and other fees, and what they sell it for at auction).  One advantage to signing a reaffirmation agreement is that your continued payments will help you rebuild your credit score more quickly.

• Stay and Pay –To “stay and pay” means to continue paying on the debt without reaffirming. Essentially, you are making payments on a debt that you no longer owe. While this option doesn’t technically appear in the Bankruptcy Code, it is still the most common because most lenders are perfectly happy to let you remain in the property as long as you continue to pay them. They will continue to keep track of what you pay, and when you have paid the full amount that was owed before bankruptcy, they will sign the title over to you. You can even sell the property, although a refinance is impossible as there’s no debt left to work with. The primary advantage to not signing a reaffirmation agreement is that if you are no longer able to pay, the lender can foreclose but won’t be able to sue you for the deficiency.

• Surrender – If you don’t want to keep your home, or if the lender is demanding that you sign a reaffirmation but you don’t think it’s in your best interest (for example because you owe far more than it’s worth, or the interest rate is too high), you may simply hand the keys over to the lender and be done with it. The chapter 7 bankruptcy frees you from the debt associated with the home, so you can rent for a few years and buy again when you’re ready without the threat of the lender coming after you.

How assets are treated in bankruptcy can be a complex issue, so it’s always best to contact an experienced Denver bankruptcy lawyer for an analysis of your case.

First, you need to decide whether you want to keep the car. If you owe far more on it than it’s worth, your interest rates are too high, or if it’s a lemon, you might be better off letting it go in the bankruptcy and replacing it.

Second, the bankruptcy trustee will be interested in whether you have any equity in the car. That is, is the car worth more than you owe on it? If so, do you have more equity than is protected under your state’s exemption statute (the law that determines what  you  get to keep in a bankruptcy)?  If you don’t have any non-exempt equity, the trustee is not going to be interested in your car. If you do have non-exempt equity, most trustees will allow you to “buy it back” from the bankruptcy estate. This is a matter of discretion and local practice, so you should consult a knowledgeable bankruptcy attorney in your area to discuss the matter.

Finally, do you still owe money for the car? If so, the lender can influence whether or not you decide to keep the car. When you file for chapter 7 bankruptcy in Colorado, all of your dischargeable debts will be wiped out. This includes not just credit card and medical bills, but also the debt you owe on your car and your home. However, even though you will no longer owe any money on your car, whether you keep your car after filing bankruptcy is largely up to you. The three most common options for your car after bankruptcy are to reaffirm, “ride through”, or surrender, and which one you choose depends on the lender’s disposition.

• Reaffirm – Reaffirmation is a process in which someone who has filed bankruptcy asks the judge to waive the discharge of a particular debt.  With a car loan, you agree that you will continue to make your payment s on the car, and that you continue to owe the debt.  As long as you continue to make payments, the vehicle can’t be repossessed. However, if you become unable to pay, not only can the lender repossess the car, but they can also sue you for the deficiency (the amount you  owe on the car and repossession costs, and what they sell it for after repossession).  One advantage to signing a reaffirmation agreement is that your continued payments will help you rebuild your credit score more quickly.

• Ride Through –To “ride through” means to continue paying on the debt without reaffirming. Essentially, you are making payments on a debt that you no longer owe. While this option was technically eliminated when the Bankruptcy Code was rewritten in 2005, it is still the most common. Most lenders will not enforce their right to make you choose between signing a reaffirmation agreement and surrendering the car because they’re perfectly happy as long as you continue to pay them. They will continue to keep track of what you pay, and when you have paid the full amount that was owed before bankruptcy, they will sign the title over to you. The primary advantage to not signing a reaffirmation agreement is that if you are no longer able to pay, the lender can repossess the car but won’t be able to sue you for the deficiency.

• Surrender – If you don’t want to keep the car, or if the lender is demanding that you sign a reaffirmation but you don’t think it’s in your best interest (for example because you owe far more than it’s worth, or the interest rate is too high), you may simply turn the car over to the lender and be done with it. The chapter 7 bankruptcy frees you from the debt associated with the car, and you’re free to go out and find something new.

How assets are treated in bankruptcy can be a complex issue, so it is always best to contact an experienced Denver bankruptcy lawyer for an analysis of your case.

Photo credit: Joanna Poe (via Flickr).

Many large creditors don’t bother attempting to sue you to collect what’s owed. They often sell or assign your debt to smaller organizations that only collect debts. In some instances companies try to collect debts that they have no right to enforce, so it’s important to have your case analyzed by an attorney.

• Do I have to file an answer or appear at the date and time stated?

In a debt collection matter, if you don’t file an answer or appear, the court will render a default judgment against you. This is essentially an order from the judge stating that you’ve lost the suit and the debt collector can now take your property to satisfy the debt. While in most instances you don’t need to appear or file an answer, doing nothing is generally not the best choice for the reasons set out below.

• What can the creditor do to me if they win the lawsuit?

The most common debt collection method is garnishment of wages. Most creditors can take about 25% of your take-home pay for as long as it takes to satisfy the debt, attorneys’ fees, and accrued interest. Another popular tool is the seizure of money in your bank account. If you have had money taken from a bank account, contact an attorney right away, because there’s a chance you can get a big chunk of it back. Less common collection methods are liens against your home or car, attachment of tax refunds, and others.

• How do I file an answer?

Some creditors will include a blank answer form with the summons and complaint for you to fill out. If they haven’t, you can get a one from the court’s website, or contact my office for one. Take it to the clerk of court and pay a filing fee of about $100-150. It is strongly recommended that you consult with an attorney prior to drafting your answer because the debt companies will use your answer against you if it’s not prepared in a specific way.

• What’s the benefit from filing an answer?

The greatest benefit is that, sometimes – especially when the answer is prepared by an attorney – the debt collector just stops the lawsuit. They want to collect the most money with the least amount of work, so your answer indicates that you’re not going to let them walk right over you. Another benefit is that filing an answer will give you time to either negotiate a settlement, or get your bankruptcy ready.

• Should I fill out the “Optional Information Sheet” included with the summons and complaint?

No, the creditor will just use this information against you. However, if you’re presented with a similar list of questions that are not designated as optional or voluntary, you may need to answer and return them promptly or you could face a contempt of court citation. If you’re not sure which one needs to be returned, call my office for help.

• Should I still respond if I’m pretty sure that I do owe the debt?

In addition to the other benefits that come from filing an answer listed above, there are other reasons not to just give in if you’ve been sued. Even if you did incur the debt, it may be old enough that the creditor no longer has the right to sue you for it. Additionally, creditors will often try and collect additional fees and interest from you that they are not entitled to you. Because a judgment stays on your credit report for several years, it’s in your interest to resolve the matter before the end of the case.

• Can I stop a wage garnishment once it’s started?

Only a bankruptcy, loss of employment, or dramatic reduction in income can stop a garnishment.

• Can a bankruptcy help me?

It’s not too late to file bankruptcy even if you’ve been sued, have a judgment against you, or are being garnished. Bankruptcy can stop your creditors from calling you and seizing your money or property, wipe out debt, and give you a fresh start. The sooner you seek help from an experienced bankruptcy and debt resolution attorney, the better.

The Summons and Complaint

For most people, the lawsuit process begins when you are served with a summons and complaint. The summons contains basic information about the administrative aspects of the suit including the court when the case was filed and some basic instructions. Probably the most important piece of information on the summons is the return date, or the date on which your creditor will win a judgment against you if you don’t take any action. The complaint sets out the basic argument against you and normally states the reason you’re being sued, the amount you’re being sued for, and the identity of the original creditor if the party suing you is a debt collector.

In some cases, there will be a couple of other blank forms given to you with the summons and complaint. One of the attachments is likely a list of questions about where you work and bank. These questions are designed to make it easier for the creditor to collect the debt in the event that it wins the lawsuit. Because of this, it’s generally best to avoid filling this form out unless you must. Knowing which list of questions you can ignore and which you must complete is the tricky part, especially given that the failure to complete and return court ordered interrogatories can result your being held in contempt of court and a bench warrant being issued for your arrest. Many times these forms will say optional or voluntary across the top, in which case they can be ignored. If not, or you have any question, fill it out and send it back or talk to an attorney.

Filing an Answer

Also attached may be a answer form that you can complete and return to the court setting out any reasons why you should win the lawsuit. If you plan on filing an answer, it would be wise to speak with an experienced debt attorney because they know how to draft this document in a way that minimizes the risk of the creditor using your words against you and increases the chances that the creditor will leave you alone and move on to an easier target. Regardless of whether you prepare your answer yourself or have an attorney do it, you’ll probably want to hold off on filing the answer for as long as legally permissible in order to give yourself more time to look at other options such as chapter 7 bankruptcy, chapter 13 bankruptcy, or debt settlement.

What The Debt Collector Can Do To You

If you don’t take any action or you move through the trial process and lose, the actions the creditor can take against you vary depending on the state you live in. The most common method to collecting on the judgment is a wage garnishment. About 25% of your take-home pay will be removed from your check each pay period until you’ve repaid the judgment amount, filed bankruptcy, or worked out some other arrangement with the creditor. Another popular form of debt collection is to seize the money in your bank accounts. Again, the amount they can seize varies depending on the laws of your state, but unlike a wage garnishment you can reduce the amount taken by simply limiting the amount you have on deposit. Other less common collection methods include repossession of secured assets and placing liens on property.

Get Help

If you’ve been sued by a credit card company or a debt collector, it’s not too late to seek help. Talk to a debt relief or bankruptcy attorney as soon as possible to avoid making mistakes during the lawsuit process, to learn how to protect your assets, and to come up with a plan on how to deal with your debt so you aren’t sued again.

My Home is Underwater – What do I do?

When you owe more on your home than it’s worth, trying to get your financial life back on track can be a tough to do. Holding onto a home on which you’re significantly underwater is not only a bad investment, but it can also compromise your ability to fulfill your other responsibilities. Fortunately, with the help of an experienced professional you can take advantage of one of several options which will allow you to put the consequences of the recent recession in your past. While each of these options will likely have a negative impact on your credit, in many circumstances this will be a reversible and worthwhile price to pay to get out of a bad loan.

Just Walk Away

A limited number of states have laws, called anti-deficiency statutes, which provide that if your home is surrendered, the lender can’t sue you to recover the difference between what you owe and what the home eventually sells for. These are states that have decided that lenders, and not consumers, should bear the greater risk of a market downturn. There are a few downsides to walking away, however. The laws do not protect you from the negative impact that a surrender will have on your credit. Additionally, mortgage lenders in anti-deficiency states can very slow to take legal title to abandoned properties, leaving you responsible for HOA fees, property taxes, and premises liability. Additionally, the lender’s delay in retaking the property may lengthen the amount of time before you can qualify for financing to buy another home.

Loan Modification

If you expect your home to recover its value in a reasonable amount of time but are having a hard time making payments, it’s probably worth attempting to modify the loan. Every loan modification is done on a case-by-case basis so the results vary dramatically, but possible outcomes include forgiveness of missed payments or moving them to the end of the term, reduced interest rates, reduced payments, and very rarely a reduction of principal. Start by calling your local HUD office for free or low cost assistance, as they may already have agreements worked out with lenders and are familiar with the process. If you decide to attempt a loan modification, you’ll need to be patient and persistent. A common complaint is that the lenders frequently lose paperwork or requests the same information multiple times, so be sure to keep detailed records and copies and keep at it. Also, be sure to have a Plan B and be ready to put it into effect quickly as loan modification frequently fails and a foreclosure can follow shortly thereafter.

Short Sale

In a true short sale, you sell your home for less than what you owe on it and the lender agrees to forgive the difference. This is different than what many realtors and lenders have been calling a short sale – a transaction in which the sale of your home for less than what’s owed is approved, but the lender retains the right to sue you to collect the unpaid balance on your loan. This major distinction makes it very important that you find a realtor who has a strong background in short sales, rather than someone who is just marketing themselves that way. Getting the wrong type of short sale can be worse for you than doing nothing at all, and an experienced realtor will know what sorts of offers are most likely to get accepted by the bank.

Deed in Lieu of Foreclosure

A deed in lieu involves the voluntary surrender of property to lender, thus avoiding the expensive foreclosure process and a time consuming and effort intensive short sale. Most lenders won’t even entertain this option unless you’ve had the home on the market for some time and you can show that you can’t afford to keep paying. Because a deed in lieu results in the lender avoiding the legal costs of foreclosure, they may be willing to offer you a small amount of money to vacate quickly and keep the property in good condition, sometimes know as a “cash for keys” program. As with all of the options listed here, you’ll want to have this process overseen by an experienced real estate professional or attorney to make sure that you don’t remain liable for the deficiency.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a powerful tool which, in some instances, can allow you to both keep you home and dramatically reduce the amount you owe on it. The first benefit to Chapter 13 is that it will stop a foreclosure, even if you’re very close to the sale date. Second, Chapter 13 provides you with an opportunity to get caught up on missed payments over a period of three to five years. Finally, you may qualify for what’s known as a Lien Strip. In a nutshell, if your home is worth less than the first mortgage, certain additional encumbrances like a second mortgage or line of equity secured by the property can be “stripped off” – that is, you’re no longer responsible for them. While bankruptcy is a time consuming endeavor, the protections provided by the court often make it a smoother process that those listed above.

Chapter 7 Bankruptcy

Chapter 7 is designed to give you a “fresh start,” in that it provides a discharge of your debt in as little as a few months without the repayment required in a Chapter 13. This means that you can walk away from your home and most of your debt without worrying about being sued months later. That said, a Chapter 7 may also help you to keep your home by improving your ability to pay your mortgage (as you won’t be paying those huge credit card bills anymore), or by giving you some leverage with the bank in your negotiations over a loan modification. Chapter 7 is most appropriate when you have a significant amount of debt in addition to your mortgage. While Chapter 7 bankruptcy likely has the greatest negative effect on your credit score, it does give you the most comprehensive benefit and provides the quickest path back to home ownership under many forms of financing.

Important Considerations

Lenders are not in the business of letting you off the hook easily, so you’ll want to make sure you have an experienced advocate on your side. This will help you avoid the unpleasant surprise of a debt collection lawsuit months after you thought you were done and ready to get on with your life.

Also keep in mind that each of these tools may have some form of tax repercussion. Forgiven debt (but not debt discharged in bankruptcy) is treated as income for tax purposes and may result in a liability at the end of the year.

Contact The Law Office of Clark Daniel Dray for a personalized assessment of your situation today.