The recent economic downturn has hit Baby Boomers with a harsh reality: their “golden year” funds are rusting. And though the “oil” for some might be to simply go back to work, many Boomers are unable to make ends meet—whether or not working again is a viable option—and are faced to choose between the lesser of two evils: foreclosure or bankruptcy.
Banks were giddy to provide mortgages and refinancing over the last several years to anyone with a pulse and, in one too many instances, were engaging in predatory tactics toward many consumers, including seniors. As an unfortunate result, banks’ shady tactics catalyzed Boomers to refinance their homes just before they were about to pay off their mortgages.
Now, with their once fruitful portfolios seriously diminished or completely gone, Boomers are finding mortgage payments are virtually impossible to make. The ensuing decision then boils down to a choice between “allowing” foreclosure or filing for bankruptcy.
The choice between bankruptcy and foreclosure is a difficult one, to say the least. Though bankruptcy will temporarily stop a foreclosure, does the negative stigma (among other consequences) of bankruptcy outweigh the potential benefit of forestalling a foreclosure?
The answer depends on four factors: the foreclosure practice of the bank, the state’s foreclosure law, the amount of equity owned in a home, and the state’s homestead exemption.
1. Foreclosure Practices
In many cases, banks, either because of their own policy or a backlog of cases, may take years to foreclose on a property. For example, many banks that received bailout money from the federal government are under pressure to allow long-time homeowners to stay in their homes.
These banks offer a variety of workout options that make it easier for homeowners to meet their monthly mortgage obligations. This could take the form of lowering the interest rate, lowering the principal (this is especially true for second mortgages that are “out of the equity”), extending the mortgage terms (longer life of the loan) and thus lowering each monthly payment, or a combination of the above.
Even if banks are not amenable to “modifying” the mortgage, they are often so backlogged that if an answer is filed in a foreclosure action, the case will be sent to the bottom of the pile. Then, the bank will instead focus on foreclosure actions where an answer was not filed, and an easy “default judgment” can be obtained.
If your bank is not in a particular rush to evict you from your house, and/or if it provides an opportunity to modify the loan, these options should be seriously be explored before retaining bankruptcy counsel.
2. The State’s Foreclosure Law
Government officials in more and more states, seeking to be the heroes of Main Street, have enacted laws that make it very difficult for banks to succeed in foreclosing on a home. This is especially true where the property is a primary residence.
Many states have enacted mandatory settlement conferences, where the bank and the homeowner must appear before an impartial party to come to an agreement. Other states have enacted complex noticing laws with minute and technical details, enabling skilled lawyers to get a foreclosure action dismissed based on technical defects.
Therefore, it is important to speak with a foreclosure defense attorney to find out how difficult it is in your particular state to succeed in evicting a homeowner under state law before pulling the “B” trigger.
3. Amount of Equity Owned
If you do not own any equity in the home, a bankruptcy will not forestall a foreclosure for long. If the bank owns all the equity in the home, it will not have a hard time “lifting the automatic stay,” especially if the debtor does not make mortgage payments after filing for bankruptcy. Once the stay is lifted, the bank is generally allowed to proceed either in bankruptcy court or state court to foreclose on the home.
If debtors do own equity in the home (i.e., the value of the home is more than the combined mortgages), then the key question becomes whether that state’s “homestead exemption” law would protect that equity through the bankruptcy process.
4. The State’s Homestead Exemption
The homestead exemption is a state law incorporated into the bankruptcy code, allowing persons who filed for bankruptcy (Chapter 7) to keep some equity in their home. The protection of this equity is and should be a serious factor to consider when deciding whether to file for bankruptcy.
Many states allow debtors to keep a modest amount of equity in their home. For example, in New York, the amount is $50,000 per individual, and thus $100,000 for a married couple. In this case, if a couple owns $70,000 in their home, filing for bankruptcy may erase all unsecured debt and allow them to retain the remaining equity in their home. Bankruptcy will not preclude the debtor from entering into a workout arrangement with the bank.
Other states, however, such as New Jersey, have much a smaller or no homestead exemption, in which case filing for bankruptcy will glean little benefit. And yet other states, including Florida, have large homestead exemptions that sometimes allow a debtor to keep all the equity in their home.
An intimate understanding of your state’s homestead exemption is vital to making a decision about whether to file for bankruptcy or not.
LOOKING FOR THE LIGHT
Baby Boomers rest assured, though the tunnel may seem never-ending, if you know how to make the most of the hand you are dealt, the light on the other end can be many shades of green or gold.
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- Edward E. Neiger, founder and partner at Neiger LLP, is a corporate and personal bankruptcy attorney who has worked on some of the largest corporate bankruptcy filings, including WorldCom, Parmalat, Atkins, Ames, Formica and Vertis.
Neiger currently works with the Bankruptcy Assistance Project to help low-income individuals file Chapter 7 bankruptcy petitions, and has been honored by the chief bankruptcy judges in the Eastern and Southern Districts of New York in recognition of the firm’s pro bono efforts.
Neiger is a foremost authority on avoidance actions, and publishes the quarterly Avoidance Action Report. He also advises hedge funds and other companies on matters related to distressed debt or assets.
Watch "Tom Brokaw Reports: Boomer$!", Thursday, March 4 at 9pm ET on CNBC. The program will also air Saturday, March 6 at 7pm ET; Sunday, March 7th at 9pm ET; and Monday, March 8th at 8pm ET.