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Bankruptcy: A Partial Solution to the New York Underwater Mortgage

The eight trillion dollar housing bubble burst, and many people took out mortgages for far greater than the actual value of their homes. The collapsing prices for housing wiped out the equity, including down payments, of many people’s homes. The result is the stagnant economy we now have.

Unfortunately, many of the homeowners in these circumstances don’t know their options, one of which is bankruptcy, but sadly, it’s not as comprehensive a solution as we wish it were.

If you own a car and file bankruptcy, you can renegotiate the principal on the auto loan secured by that car. This way you can pay it down more easily after bankruptcy. The term for this is a “cram down.” However, you cannot cram down the mortgage on your home because Congress refused to change the bankruptcy code. Had it allowed mortgage cram downs, people’s lives would be much better; the banks’ would not, which is why the law didn’t pass.

Even though the best mechanism for relief is unavailable, bankruptcy can still help.

First, it can offset your expenses by reducing or discharging other types of debt you have. Doing so can free up money for other money for other uses, including working towards rebuilding equity.

Second, filing bankruptcy gives you the benefit of the automatic stay, which bars creditors from pursuing you on a delinquent loan, especially foreclosure proceedings against your house. While the stay is in effect, you may be able to obtain a loan modification, and the bank will let you stay in your home under the changed terms.

Third, bankruptcy can also discharge two types of loans, one being second mortgages when the primary one is greater than the home’s value and the other being deficiency judgments in some circumstances. If you have a primary mortgage and a home equity loan, if the primary mortgage is greater than the house’s value, the home equity loan is unsecured and therefore dischargeable. This can wipe away a large amount of debt homeowners have. If you short sold your home or the bank foreclosed on it, you can discharge the remaining balance in bankruptcy.

Finally, a Chapter 13 bankruptcy allows homeowners five years of interest-free payments, which debtors may find helpful.

A short sale or a deed in lieu of foreclosure agreement may be effective for the underwater homeowner. However, though bankruptcy isn’t as effective as it could be without cram downs, it still provides some benefits.

For more questions about mortgage debt, credit card debt, bankruptcy, the automatic stay and effective strategies for dealing with foreclosure, please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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