We will spend some time talking about your home because the home is usually the biggest asset that most people have. Also, legislatures have recognized that people must have a place to live and homeownership has always been one of the cornerstones of American life. In fact, the number one reason people file bankruptcy is to keep their homes. Let’s discuss the 4 ways that bankruptcy may be able to allow you to keep your home.
1. The Stopping of a Foreclosure Action
Homeowners fall behind in the mortgage loan payments and they can lose their home through foreclosure. Foreclose is the last option a lender has. Previously, the lender has sent out all manner of notices and threats to get the homeowner to pay up, or make some kind of arrangements to pay, and therefore, it not a surprise when foreclosure proceedings begin.
Since the 2008 mortgage crisis, lenders have invented numerous alternatives to foreclosure. Foreclosure is the process that allows the lender(s) to reclaim the property, and then sell it to get their money back.
Foreclosure laws vary from state to state, but in Nevada, it usually begins when the lender files a lawsuit with the county, called a judicial foreclosure action. In the case of a non-judicial foreclosure, the lender records a default notice with the county and mails copies of the filing to you.
The default notice will inform the homeowner that the home will be sold through a public auction or trustee’s foreclosure sale. The time between the foreclosure notice and the trustee’s foreclosure sale is usually three to four months. During that time, the homeowner still owns the home. After the auction, the new owner can evict the borrower. So practically, the lender will usually not file foreclosure proceedings until you’re at least 90 days overdue in your payments. Typically it will be another 90 days before the public auction. So this gives the borrower at least four months to solve the delinquency problem. Here is a detailed timeline for you to review in greater detail.
A chapter-7 bankruptcy filing stays or stops, the foreclosure action temporarily until you can arrange a satisfactory solution to the payment delinquency. Your filing gives you options to head off foreclosure in 2 ways:
- The official Chapter-7 bankruptcy filing will probably allow you to get rid of most of your other debts and therefore making it much easier to afford the mortgage. If you are current or can get current with mortgage payments, the value of your home may be covered by the state’s homeowner exemption, which in Nevada is $550,000. You can then stay in your home as long as you remain current on your mortgage debt. If the value of your home is more than the available state exemption, your home is subject to sale by the trustee, and that excess is used to pay your creditors.
For example: If your home is worth $600,000, the trustee can force you to sell it, give you a check for $550,000, and the remaining fifty thousand dollars is distributed to your creditors.
- A Chapter 13 filing offers you another option to make up to the delinquent late payments over a 3 to 5 year bankruptcy plan. If you are $5000 in arrears on your mortgage, then Chapter 13 allows you to pay off the $5000 over the 3 to 5 year life of your bankruptcy plan. Needless to say, you must remain current with your regular monthly payment during this time. So, if your arrears are $5000, and your plan is 36 months, then you would pay an additional $138.89 ($5,000 divided by 36 months) each month to pay off your arrears. Remember, you may have eliminated a lot of other debt to make that additional payment affordable, and you get to stay in your home.
In some cases where the home is worth less than the first mortgage and there is a second mortgage on top of that, you may be able to eliminate the second mortgage, therefore making bankruptcy even more attractive.
2. Mortgage Restructuring
The filing for a Chapter-7 bankruptcy gives you the opportunity to take advantage, in some situations in which you may be able to restructure your home mortgage in the following ways:
- You can propose to suspend payments until you can sell the property and pay off the secured mortgage.
- Restructure the debt to reduce the interest rate and maybe change the terms.
- You may be able to eliminate part of a debt in what is commonly called, cram down or strip off, in which Chapter 13 debtors do not pay the full amount of debt, but just the value of the collateral. For example, assume your property is worth $100,000 and has two mortgages. The first mortgage is $75,000 and the second mortgage is $40,000. The first mortgage is fully covered by the value of the property and therefore fully secured. But after you deduct the $75,000 on the first mortgage from the value of the property, only $25,000 remains. You did eliminate all but $25,000 a second mortgage. If you paid a second mortgage $25,000 over the course of your Chapter 13 plan, the mortgage debt is reduced dramatically, even though you owed $40,000.
There are a few situations where residential mortgages have special protection and/or allow some modifications such as:
- Loans that are due or will come due, during the next five years, like balloon loans.
- Loans are secured by other property in addition to your home.
- Loans that are completely unsecured because the property was fully encumbered by prior mortgages.
3. The Nevada Homestead Exemption
Even in bankruptcy, there are a number of categories of debt that cannot be wiped out. Even though the Nevada Homestead exemption is generous compared to many other states. As a general rule, the equity in your home is exempt from being taken up to the amount specified in the state law; in Nevada, it is $550,000.
BUT, the exemption can have all sorts of limitations such as the following:
- If you bought your home within 1215 days in chapter-7 bankruptcy your home exemption may not equal the allowed amount of exemptions in your state.
- There is $125,000 on homesteads if you have been convicted of certain federal securities laws or criminal acts that cause serious injury or death within five years of the bankruptcy.
- The Homestead exemption may be reduced to the extent that the equity in your home was created with the intent to hinder or defraud creditors within 10 years of the bankruptcy.
- Your exemption amount may be more than the amount stated by state law because the exemption must be more to cover the costs of selling your home. Commissions and other costs must be paid before your exemption is impaired.
- Some kinds of residences may or may not be covered by the exemption, depending on the local court. Houseboat residences, for example, have for some time been deemed exempt, but sometimes not.
- If you rent out part of your home, most courts have found that it does not impair your homestead exemption.
- If you have lived in your current state for less than two years, the exemption law of your prior residence state may be the one that applies.
- In most states, you must personally live in the residence to reap the homestead exemption.
- Joint ownership of a home provides further confusion if only one spouse files for bankruptcy. Except for the eight community property states, when only one spouse files for bankruptcy, the other spouse’s interest in the property does not come into play.
So, I hope it is becoming clear that dealing with homestead exemptions is extremely complicated and one that needs to be discussed in-depth with your attorney.
Your Home Valuation Regarding The Nevada Homestead Exemption
Before we can make any decisions on how to handle your homestead exemption, you need to know how much your home is worth. If you have recently purchased your home, the selling price will be a good starting guide. You may need to hire a real estate appraiser to give you an accurate valuation. It is not wise to use either asking prices of similar homes in your neighborhood or real estate agents’ estimates. They tend to be higher estimates with the bias towards listing your home. After you have a good fair market value, you will need to make adjustments to discover the real net value.
Take the real net value of your home, subtract the cost of selling it, which may be as high as 10%. From that number, subtract the amount owed on any outstanding mortgages and the amount owed on any other liens or judgment, real estate taxes, etc., and this figure will be your real equity. If your real equity is less than your homestead exemption, then this is the amount that you claim as exempt, not to exceed the exemption limit in your bankruptcy.
In conclusion when contemplating the various financial and personal issues involved with filing for any type of bankruptcy please be sure to consult a qualified and experienced Nevada bankruptcy lawyer, especially if you are you in a considering entering into a Chapter-13 bankruptcy plan. Renting your home, moving, making improvements, refinancing, signing a contract to sell can all have serious consequences for debtors.
Please call our office at (775) 786-7600 or (775) 690-9120 and set up an appointment for a free and confidential consultation with me to discuss your financial situation. We will investigate all of your options and alternatives, even those that don’t require you to file bankruptcy at all. Feel free to visit our website at www.harrislawreno.com to learn more about our practice and services here in Reno.