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Two key markers of financial distress are bankruptcy and home foreclosure rates. The mortgage crisis of the past several years has hit Californians hard, and is a major cause of the large number of bankruptcies filed here. But we may see a gradual reduction in the number of foreclosures as federal and state regulations begin to protect a larger number of homeowners with upside down mortgages.
There are hopeful signs. In 2011, 3.2% of California homes had a foreclosure filing, down from 4.1% in 2010. Median selling prices of homes in the state were up 16.6% in December 2011, over their lowest point in February 2009. 24.6% of all sales were bank-owned properties and 22.2% were short sales in December.
Bankruptcy filings also declined a bit. There were 260,210 filings in California in 2010, and around 248,000 in 2011. But that still represents 8,300 filings per million adults – and many of those were forced into bankruptcy by high mortgage interest and loss of home equity. It will take time for the dust to settle.
Can filing bankruptcy save your home? Are there other options? Let’s take a quick look at possible solutions to homeowners’ financial problems:
There are various federal and state programs put in place over the last three years to assist homeowners who have regular income but can’t afford their rising mortgage interest rates. The rules are stringent, and many homeowners can’t qualify because of other debts, inability to keep up regular payments, (even at a lower interest rate), and because many banks and lending institutions are slow to process applications. If there is also a second mortgage or home equity line of credit on the home, the process becomes even more difficult. This is certainly the first option to try, but success rates have been fairly dismal so far.
Realtors have been a moving force behind short-sales in the past couple of years. This option requires the lender to agree to permit the homeowner to sell the property at less than the amount of the remaining mortgage. The homeowner may get out from under the property without a foreclosure on the credit record, but it still impacts the credit rating. Many lenders are reluctant to consider short-sales, and of those who do, many often take months or a year to give approval so the sale can close. Again, if there is a second lien on the property, a short-sale can be tough to negotiate.
Lenders were very quick to foreclose in the past few years, helping precipitate the economic downturn in the U.S. Improper or illegal approval of foreclosures by some lenders added to the misery of homeowners who were desperately trying to save their homes. Lenders are now required to look more carefully at foreclosure, and to attempt to avoid it by working with homeowners if at all possible. But many homes are still in trouble, and if homeowners can’t negotiate a short-sale or a greatly reduced mortgage payment, we can expect many more foreclosures in the near future.
Chapter 7 is for those who do not have the income – for whatever reason – to pay off their creditors in a reasonable amount of time. Losing a job has been a big factor in the last few years. Medical disability or loss of a spouse are other reasons your current income simply won’t stretch to cover all of the everyday living expenses and other debts that have piled up. It is unlikely that Ch 7 will be able to help save your home if it has little or no equity and mortgage payments are high, or if you are behind on making your payments.
Chapter 13 is for those who do have regular income that is likely to continue over the next few years. Interest on mortgage payments and credit card debts may have increased so much that it is now difficult to pay them each month. Filing Chapter 13 puts all of your assets into the hands of a bankruptcy trustee, who approves a payment plan for you, negotiates with your creditors to set up a reasonable repayment plan, and then makes those payments for you on a regular schedule for a period of three to five years.
In a Chapter 13, it is possible to strip away a second mortgage or equity line as part of the bankruptcy process, totally eliminating that monthly payment, and making more of your income available to pay off the first mortgage or other debts.
This article was originally published HERE.