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What you Must Consider before Walking away from your Mortgage?


Around the country, an increasing number of homeowners have found themselves struggling to make difficult decisions as adjustable rate mortgages rise and it becomes increasingly hard to meet all of their financial responsibilities. A short sale is often not an option for many homeowners as more and more banks are requiring homeowners considering a short sale to sign a promissory note for the balance on the loan. Since this would ultimately defeat the purpose, it isn't realistic for such homeowners. Neither is bankruptcy an option for homeowners in such a difficult position as they often make too much money to qualify for Chapter 7 under the new bankruptcy rules. Backed against a wall, some homeowners have found themselves considering just walking away from the mortgage and allowing the home to go to foreclosure in order to save money and be able to still pay smaller debts. Trying to determine how to get out of such a difficult situation is definitely a conundrum.

Before making any hasty decisions, it is important for homeowners to first take a deep breath and ensure they have investigated all of the options that are available to them. One of those options could be assistance from the federal government. Homeowners whose lenders will not agree to modify their loans or forgive their loan deficiencies through a short sale may be able to receive help from the government. Last year the Making Home Affordable program was signed into law. Through this program homeowners who are struggling may be able to receive help with mortgage modification and refinancing. There are conditions which apply.

Bankruptcy should not be completely ruled out. In some instances, a specialist may be able to provide guidance that could assist homeowners in taking full advantage of bankruptcy laws. Such laws tend to vary from one state to another and the laws also change frequently. As a result, it is not uncommon to receive different answers from different people. It is definitely worth it to make sure that you have the most up to date and relevant information for your situation.

It is also a good idea to check and see whether you are still able to qualify to file for Chapter 7. This is by far the simplest way of clearing debts and being able to walk away and start with a clean slate. Many people either assume or have been told they make too much money to qualify to file for Chapter 7. While the changes to the bankruptcy law which were made in 2005 did make qualifying more difficult, the new means test is much less restrictive the many people believe. Even attorneys can get it wrong sometimes. Some fairly generous exclusions are allowed regarding gross income under the new test. For instance, you may be able to deduct some 409(k) and pension contributions. In addition, you may be allowed to deduct charitable contributions up to a certain percentage of your gross income. Such exemptions can lower your gross income that counted for the means test, which means that you may qualify after all.

It is also important to recognize that even if you are not able to qualify to file for Chapter 7 right now that could change in the future. Mortgage payments are also excluded from your gross income under the means test. Even if you currently make too much money to file for Chapter 7 right now, if your mortgage rates should rise in the future it could be enough to allow you to qualify.

Depending on your situation, you may actually be able to benefit from Chapter 13 instead of Chapter 7. Chapter 13 is typically regarded as a bankruptcy option for those individuals who do not qualify to file for Chapter 7. Under Chapter 13, you will be held to a debt repayment plan with the court working out the amount of your unsecured debts that you can be expected to realistically repay. The court will also establish the schedule for you repaying the debts.

While Chapter 13 will not reduce the value of your mortgage, a loop in the law may actually be able to help you if the value of your property has fallen enough the court may be able to assist with a loan modification. This particular law can be quite beneficial if you happen to have two mortgages because it means that the court might be able to modify the second mortgage and possibly even reduce it down to zero.

If no other options work, you may find that you do simply need to walk away from the mortgage; but at least make sure that you have pursued all other options first.


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