In times of financial crisis, people turn to their lenders for help, but all too often they find out their lenders are not interested in saving their homes. That’s right: the banks’ loss mitigation departments are focused on saving the lender’s bottom line, which is connected to the bottom line of their investors.
Banks bundled up these Mortgage Backed Securities (MBS) and sold them to investors who are not interested in hearing their investment has gone south. Therefore, lenders are not approving loan modifications (LM) unless the modification minimizes their losses and brings value to their investment. They use a Net Present Value formula to determine the viability of the loan modification and use it as a basis for their decision. Banks are real speculators and are looking at your situation in terms of risk and return on investment. In other words, if you are unemployed and have some equity in your home, they’ll probably want you to sell your house before approving a modification. If they approve your LM they’ll expect you to be at least 2-3 months behind in your payments and, even if they approve your LM, they’ll put you on a trial period and wait three months before approving it.
So, if banks are real speculators, shouldn’t you be one too?
Short selling your home (selling it for less than the amount you owe on your loan) is not a good option for someone who has invested their life savings in upgrading their home and built a lifetime of memories in the house. For these people, bankruptcy is an option and they should not feel bad about it because this is their right and can be the wisest decision!
For someone who has a lot of debt (over $ 30,000 in credit card debt), no equity, and their income is not enough to make ends meet, it makes sense to file for bankruptcy to avoid foreclosure and secure your home. Under chapter 13, it is possible to wipe out your unsecured debt and walk away with just a mortgage payment. If you have a second mortgage that isn’t secured by the equity of your house you can also wipe out your second mortgage along with your credit cards. That’s right, it is possible to wipe out your second mortgage and build up equity that way.
Will bankruptcy mess up your credit? Yes it will prevent you from having credit for the next three years and will stay on your record for the next 7 – 10 years. However, as a speculator you should look at the bigger picture and ask yourself, do I really need my credit for the next seven years? Your credit will repair itself, whereas your unsecured debt may not go away after 7 – 10 years, and your quality of life may be seriously affected by it. Moreover, if you are defaulting on your mortgage because you cannot afford your debt, your credit history has already been affected, and you may not be able to use your credit anyway unless you pay off some of your debt.
If you or someone you know is afraid of bankruptcy because they are concerned about their credit rating, they should discuss this option with a bankruptcy attorney to look at their options and see if bankruptcy is in their best interest. Filing for bankruptcy is not for everyone and you should consult with an attorney before doing this. You can stop foreclosure with a bankruptcy filing but you still need to have a steady source of income to remain financially stable and afford payments to the trustee for three years.
For more information about bankruptcy, please contact the debt and bankruptcy clinic in south Seattle at 206.267.7070. Their hours are from 9:00 AM to noon Monday-Thursday.