With unemployment hovering at 10%, many people in the US are facing bankruptcy and foreclosure. Some of the people are in bankruptcy because of the foreclosure. With the prices of houses in the US continuing to depreciate, most Americans are finding out that they owe more on their first mortgage than their house is worth. Back in the credit heyday, when people could finance up to 120% of the value of their home, individuals would take out a line of credit to make home improvements or even buy a boat. Since property values have dropped so much, that second mortgages have no equity in the property to support them, making the second virtually unsecured.
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Depending on your personal financial situation, you could file Chapter 7 bankruptcy if you qualify. Filing for bankruptcy under Chapter 7 might be risky because the second mortgage holder could exercise the option to foreclose. In most cases, this would not happen because the lender would be responsible to pay the first trust deed and would end up with a piece of property that they owe more than it's worth. There is it a good chance that Chapter 7 bankruptcy would work in this situation, but there is a risk.
If the debtor has enough disposable income to file Chapter 13 bankruptcy, than this would be another available option. Chapter 13 bankruptcy will require the debtor to negotiate a 3 to 5 year Court approved payment plan with the creditors. The main benefit of a Chapter 13 is the debtor rarely loses any property unless they choose to surrender it. Many people use Chapter 13 when they want to keep their family home and be able to get caught up on all their debt. When a debtor has a second on their home and there is no equity to support it, they can strip the lien and wipe it out as unsecured debt. Most courts require the debtor to complete the Chapter 13 payment plan in order to use lien stripping.
When considering the differences in Chapter 7 and Chapter 13 bankruptcy it's important to seek the advice of a bankruptcy attorney qualified in this form of law. Bankruptcy attorneys know the trustees and are familiar with the District court in which you are filing, giving you a huge advantage. Recently, because of the housing meltdown, some bankruptcy lawyers have been getting very creative using the law to benefit their clients. Some attorneys will file a Chapter 7 to wipe out the unsecured debt, and follow it up with a Chapter 13 to negotiate the real estate with the lender.
When filing bankruptcy, many times it's beneficial to try and stay in your house and avoid foreclosure, as it might be cheaper than renting something similar. If the debtor is still employed, there is a good chance they could afford the payment if they could eliminate the credit card debt and the second on their home. Removing these two, from their monthly bills, many times will just do the trick. The first step in moving towards financial freedom is consulting with a bankruptcy lawyer in your area. Spend an hour and see if there is any value there for you and your family.
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