Letting Go: A Possible New Solution for Florida Homeowners in Distress

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According to the Bureau of Labor Statistics, unemployment in the United States has been holding steady at 9.7 percent in 2010, after peaking at 10.1 percent in October 2009. In contrast, the unemployment rate in Florida is on the rise, reports the Sun Sentinel. In March 2010, unemployment rose to 12.3 percent, the highest since recordkeeping began in 1970. This is an increase of 2.7 percentage points from the March 2009 rate.

With unemployment rates at these levels, many people in Florida and beyond are contemplating filing for bankruptcy or facing the prospect of losing their homes.

Bankruptcy for Homeowners

In times of severe financial hardship, many homeowners are unable to afford their mortgage payments. Due to declining property values, homeowners are often unable to sell their homes. Faced with these circumstances, more and more homeowners are allowing their homes to be foreclosed and then looking for bankruptcy relief to discharge the potential deficiency that could result. A deficiency occurs when the mortgage company forecloses on the home and then sells it for less than the full amount the homeowner owes. In this case, the homeowner is liable to the mortgage company for the balance.

By filing bankruptcy, the homeowner is able to discharge the personal liability for the deficiency balance. Depending on whether the homeowner has a reliable source of income and any substantial assets to protect, he or she may look for relief under chapter 7 or chapter 13. While chapter 7 bankruptcy provides the quintessential fresh start, chapter 13 bankruptcy offers homeowners a “reset” option. Some types of debts cannot be discharged whether the debtor is filing under chapter 7 or 13.

Chapter 7 Bankruptcy

In a chapter 7 bankruptcy, the homeowner keeps exempt property – property that has been protected by law. Nonexempt assets are sold and the proceeds of the sale are used to pay creditors.

Whether the home can be saved depends on the state homestead exemption amount and the current equity in the home. Article X, Section 4, of the Florida Constitution allows certain homesteads an unlimited homestead exemption. Pursuant to a recent bankruptcy case however, the Bankruptcy Abuse Prevention and Consumer Prevention Act (BAPCPA) may limit the exemption as it applies to recently acquired equity in the homestead.

Personal property exemptions may allow debtors to keep a vehicle or other items; however, nonexempt property will be liquidated, or sold, to pay off debts. Following a chapter 7 bankruptcy, the debtor’s dischargeable debts will be discharged, even though the proceeds of the liquidation will almost certainly not be sufficient to pay off the debts in full. Not all homeowners qualify for a chapter 7 bankruptcy.

Chapter 13 Bankruptcy

In chapter 13 bankruptcy, the debtor is allowed to restructure certain debts and to keep some nonexempt property. The debtor negotiates a workable payment plan, usually three to five years, to pay off the restructured debts. Other nonexempt property is sold and the proceeds are used to pay off creditors.

Upon completion of all payments required under the plan, the debtor’s dischargeable debts are discharged. Under chapter 13, homeowners may be allowed to keep the homestead even if their equity exceeds the homestead exemption value, provided they can negotiate a payment plan with the lender.

Short Sale Program

The federal Foreclosure Alternative Program offers incentives to loan servicers and borrowers for completing a short sale rather than foreclosing on the home. A short sale occurs when the homeowner sells the home for less than the outstanding mortgage amount, but the lender has agreed to take the sale price in full satisfaction of the mortgage.

Instead of focusing on keeping the homeowner in the home, this new program is aimed at expediting the owner’s exit from the home, theoretically to save time and expense to the lender, loan servicer and borrower, and also to prevent empty foreclosed homes further driving down neighborhood housing values.

According to a recent New York Times article by David Streitfeld, more than five million households are behind in mortgage payments and at risk of foreclosure. The Foreclosure Alternative Program is designed to motivate all parties financially toward a short sale:

  • The loan servicer receives $1,000
  • Junior lien holders can receive up to $1,000
  • The homeowner receives $1,500 in relocation assistance

Under the program, real estate agents determine the value of the home, which is not disclosed to the homeowner. If an offer is made on the property that is equal to or exceeds the value set by the agent, the lender must take it. Therefore this may not be a viable solution for homeowners with large second mortgages or home equity lines of credit; these homeowners would remain liable on any additional loans even after leaving their homes.

Florida homeowners who have suffered a job loss or are falling behind on mortgage and other payments should contact an experienced bankruptcy attorney. A lawyer can explain bankruptcy and foreclosure, and discuss alternatives to both.

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