Mortgage Principal Reductions with Bankruptcy

If you have read any of my articles on avoiding foreclosure or stopping foreclosure with bankruptcy you will certainly not want to miss this one. We recently had a case where a single mother of 4 was losing her home in Moreno Valley, California. As most homeowners in the inland empire her home was seriously upside down due to a refinance with cash out in 2007.

Unfortunately she has suffered a significant loss of income as many California homeowners, and would not qualify for a loan modification under the HAMP guidelines and the home was $300,000 upside down. By filing chapter 7 bankruptcy, and stating the client wanted to retain the home even though she was not current, we are able to assure the elimination of a $200,000 1099 from the lender and propose a resolution to the investor.

If the investor forecloses they still must liquidate the property leaving them with a huge loss or carry the REO on their books. Not a good deal for them or our client! Bankruptcy attorneys are required to attempt a loan modification through bankruptcy, and if the investor agrees there could be a significant principal reduction to the homeowner in an effort to retain the property.

Yes it's a gamble, but if you win, you win big. The cost involved with a foreclosure and REO can be as much as an additional $75,000 to the investor with attorney and broker fees. With our clients situation, by filing chapter 7 bankruptcy we were able to completely eliminate all her unsecured debt and by bringing the home down to current market value ($210,000 from $465,000) our client could afford the home on her $55,000 salary, saving the investor thousands as well. In matter of fact, the lenders now are sending out notices offering loan modifications in bankruptcy, trying to mitigate their losses.

Let's face it, loan mods haven't been working at the level required to get our real estate market stabilized. Principal reductions through loan modifications are offered sporadically, but nowhere at the level needed to pull out counties suffering at the rate Riverside County is. Some of these properties are over 50% upside down on their mortgage, so why wouldn't someone walk away even if you gave them a interest free loan? They're still paying 100% on a home worth half that amount.

By filing chapter 7 bankruptcy, eliminating all your unsecured debt and protecting yourself from a 1099 or deficiency judgment the gamble on keeping or losing the home is worth it. I mean who wouldn't bet one dollar to win thousands? Weather or not your a gambler, the risk versus reward is significant enough it makes perfect sense. So if you are trying to avoid foreclosure or considering short selling your property you need to review your options with bankruptcy chapter 7. The Law Offices of Zhou & Chini offers free consultations to homeowners who have been denied a loan modification or have been declined for a permanent loan modification after a trial mod. Please call our law firm at (800) 972-9600 and we will be happy to offer you free legal advice. The bankruptcy attorneys at Zhou & Chini are consumer advocates and are here to help you save your home from foreclosure.