Since the real estate melt down back in 2007 prices on property have steadily continued to decline from their highs. People who purchased their real estate in 2000 or before should be okay. This is of course, as long as they did not refinance or take equity out of their property. If these people don't have a real good job, they will be up a creek without a paddle. Some of these individuals took out subprime loans and sucked all the equity out of their property to buy a boat or a fancy car.
Now that prices have dropped so much they are upside down on their mortgage with the loan amount being way higher than what the property could sell for. Now that many of these loans are coming due there are a lot of people that are starting to freak out, wondering what happens if they do not, or cannot pay their mortgage. Depending on the person's financial situation, one alternative might be filing bankruptcy. With bankruptcy there are a few choices that can help people in different situations. Chapter 7 bankruptcy is good for an individual that has a large amount of unsecured debt, like credit cards, medical bills and payday loans. Whereas, Chapter 13 bankruptcy is a powerful tool that will stop a foreclosure and allow the debtor to renegotiate their debts with the creditors.
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When looking at all the options an individual can use for their mortgage, if an individual can afford to continue paying and are current, there is no way to use bankruptcy as a way out. There is a strategic default option which means simply stop paying for your house. The downside to this is there is no way to predict what the bank will do once you stop paying. One option for them is to file a foreclosure on the property.
Another option if you want out of the property is a short sale. In a short sale the lender has to agree to the terms. After some short sales many lenders will sue the debtor for the deficiency or just file Form 1099C with the IRS, making the debtor responsible for the income. It's always best to consult a bankruptcy attorney before making a decision like this as it might affect the benefits of the debtor's bankruptcy filing.
Nowadays, if an individual can afford to make their house payment, don't hold your breath waiting for the bank to foreclose. The reason they are not foreclosing on properties right now is their already stuck with thousands of homes that they can't sell right now. This has not been enough motivation for the banks to offer loan modifications to the upside down homeowners. The Chapter 7 bankruptcy can stop a foreclosure, but in most cases it will only be temporary. If someone wants to modify their mortgage, they should consider filing Chapter 13 bankruptcy. When filing Chapter 13 you will definitely get the attention of the mortgage company. In many cases, if the debtor is upside down on their property with a second trust deed added, the court will allow the debtor to strip off the second and make that debt unsecured. Many times this in itself might help the debtor be able to afford the mortgage payment. If not, the bankruptcy attorney can negotiate with the creditors for what is affordable to the debtor to be able to keep their property.
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