Pro's and Con's to Chapter 13

[Casual Observer]

I paid 640k with 10% down for a home that is now likely to sell for closer to 400k perhaps a little less. We took out an 80/10 with separate mortgage companies.

My wife has lost her job and I am now the sole support of our 5 person household.

We have no other significant debt. No college loans, car loans, etc. Just a single credit card that we use to make 98% of our purchases and is paid off in full every month.

In addition I'm 32, have a gov't pension and probably $60k in cash, not counting Roth IRA's for my wife and I.

Recently my loan servicer has forgiven 3% interest annually for the next 5 years and perhaps longer on my first mortgage. At the end of five years if the state of things have improved, we go back to our original interest rate.

My question: (edit:assuming the legislation passes) Is it worth it to file for a Chapter 13 in CA to get the second stripped and the first crammed down?

That's a $185k in debt reduction and I'm pretty sure we can live on cash. I imagine it would trash our credit, but then we always pay everything off in full every month so all we really need is a small revolving account worth $3k maybe.

Thoughts?

[Casual Observer]

Re: Pro's and Con's to Chapter 13

I'm asking because I don't see a down side and I'm sure there must be one.

[BiscayneSunrise]

Re: Pro's and Con's to Chapter 13

I know some people who were in similar situations to yours who just walked away from their house without filing bankruptcy. Things are changing rapidly so you need to have this discussion with someone who works with this every day

I believe your best bet would be to discuss this with some people in your area who are experts in the field. Foreclosure avoidance people, local mortgage lenders and attorneys, etc. Even my local Congresswoman, is offering foreclosure seminars. They would certainly know if there is any gov't assistance available.

[Sharky]

Re: Pro's and Con's to Chapter 13

I'm no expert, but as I understand the cram-down deals, some of them can bind you to the house for a long time. So I guess the downside is that prices go down another 30 to 40%, but then you can't walk away; you're stuck at whatever the cram-down is set at.

You might be better off walking away and renting. Depending on which state you're in, that might not even impact your credit rating.

[swgprop]

Re: Pro's and Con's to Chapter 13

My question: Is it worth it to file for a Chapter 13 in CA to get the second stripped and the first crammed down?

That's a $185k in debt reduction and I'm pretty sure we can live on cash. I imagine it would trash our credit, but then we always pay everything off in full every month so all we really need is a small revolving account worth $3k maybe.

Thoughts?

First of all, cram down legislation has passed the house but is stalled in the senate, so as of today there is no cram down option available if you file BK 13.

Secondly, if the bill does pass it, there will likely be restrictions or guidance on the circumstances under which a cram down is appropriate, thus you won't be guaranteed that outcome.

You are in California, you have a first and second which, I assume, are the original purchase money deeds of trust. If that is the case they are non-recourse, meaning if you walk away the lenders' only recourse is against the property; they cannot pursue you for a deficiency.

Whether you walk away or file BK your credit will be trashed. If that is the only negative credit event you may be eligible for mortgage financing again in a couple of years.

You state your wife lost her job and you are the sole support of the family, your servicer dropped the interest rate on the first to 3%. But you didn't state whether you are truly strapped financially. Are you able to maintain the household with your salary or are you dipping into savings? Is this purely a financial decision? Are you happy with the house, neighborhood, school system, etc.?

There are a lot of factors involved, some financial, some not.

From a purely financial perspective, you could walk away and probably rent a comparable house for much less than you are paying now or wait and see how the cram down legislation plays out and decide then.

Best of luck.

[Casual Observer]

Re: Pro's and Con's to Chapter 13

The interest rate cut dropped our payment by about half, so we are now able to make the payments, though they are still a much larger percentage of our now considerably lower income. Still we are savers that know how to live within our means, so we could manage just fine.

I'm thinking more from a purely selfish point of view.

Is erasing 185k of debt with no value worth the effects of bankruptcy?

I'd like to keep the house, because the neighborhood is nice and it's well built, but I'm not married to it.

[Casual Observer]

Re: Pro's and Con's to Chapter 13

I've contacted a local bankruptcy attorney and am awaiting a response. I imagine they're pretty busy.

I just wanted a different point of view, because I'm sure the attorney would tell me it's worth it regardless.

[aaron]

Re: Pro's and Con's to Chapter 13

This is a no-brainer. The banksters have been advertising housing as the greatest investment in the world. Well, your investment has gone to shit. Do what any good investor would do and cut your losses and run. There are a million people like you, and will probably be millions more. Your credit rating is shot, but so long as you pay your other bills, banks will probably loan to you again. (or they will have no customers at all). It is INSANE to pay 600 K for a 400K "asset". Before all the loans in our country are owned by the government, you should get out while you can. Picture IRS agents putting you in jail because you are one of those "greedy rich people who can pay their mortgage but choose not to."

I "own" 2 houses. One is not under water, but I cannot make the mortgage payments. "Surprisingly" the bank has been quick to start the foreclosure process. They smell profit. I doubt the bank will be so anxious to take "your" home. As soon as they do, they have to realize a loss. I suggest you live rent-free as long as you can.

Is your loan even eligible for Obama bucks? I thought they needed to be non-jumbo loans... you know, the types the 'macs can buy.

Bankruptcy affects other parts of your life, including rental applications, health insurance, and even job applications. Now, if you can guarantee a cram-down, and you really love your house, and you are willing to give up all of your savings, and you are willing to sign your life away, then you might consider doing it. Personally, I want to feed my kids with my savings. The banksters can use tarp money to feed theirs.