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Ask Pay Dirt: Can I Clear My Debt, But Keep My Home?

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“Ask SmartMoney” is a regular feature in SmartMoney magazine where experts answer readers’ personal finance questions.  In this spin-off, we’re answering some of the consumer-related inquires here on PayDirt.  We’re also taking new questions, which you can email to paydirt@dowjones.com.

Q: Is it possible to declare personal bankruptcy and still keep my apartment? I owe around $800 on various loans and another $250 per month on my credit card, neither of which I can meet. The interest is astronomical. The latter was not a smart decision as I have always been careful about credit-card bills, and it was my intention to pay it off rapidly. However, I recently lost my job. It was a case of really bad timing. I was fortunate enough to rent out my apartment in Queens, New York and move in with my girlfriend. The rent almost covers my mortgage, but I have must supplement it by around $200. I have some savings to supplement that until my situation approves. But now my loans are pushing my bank account into the red. What do you advise?

Sinking in Queens (New York)

A: If you qualify, you can file for a short-term Chapter 7 bankruptcy and eliminate your unsecured debts in one shot.  The Chapter 7 will also enable you to walk-away from the apartment owing nothing if you chose to do so.

If you don’t qualify for Chapter 7, you can do a court-monitored Chapter 13 bankruptcy and protect your primary residence. The good news is that even if you want to keep the house, New York State recently changed the bankruptcy law in a way that really helps people in your situation. Under these changes, you are able to exempt up to $150,000 in equity per person on the title to your primary residence. (If you were married you might be able to protect up to $300,000 of equity in your house and still get rid of the credit card debt.)

New York-based bankruptcy lawyer David Waltzer, owner of Waltzer Law Group, says, “Because of changes this year in the New York Bankruptcy Law, many people can file bankruptcy and still keep their home, cars and other assets, particularly if the bank owns most of your house.” If you have a $500,000 house, but the combined amount of your mortgages and liens is $500,000 or more, Waltzer says a Chapter 7 bankruptcy will not put your house at risk. He says if your house is worth $500,000, and your mortgage is only $200,000, in parts of New York you can file for Chapter 7 bankruptcy on your credit-card debt and your house could be 100% safe.

“But if you want to keep your house but have fallen behind on mortgage payments, Chapter 13 bankruptcy might be your solution,” he adds. “It will enable you to keep your house so long as you can keep up with mortgage payments and break up your mortgage arrears into 60 payments.” He adds, “We often get clients that were sick or out of work and fell six-months behind on mortgage payments. They might owe $30,000 in mortgage arrears.  Now they are working and can afford the mortgage, but catching up with the arrears would be impossible.  A Chapter 13 bankruptcy would let the clients repay the $30,000 over 5 years at $500 per month. It can be a real home-saver.”

New York attorney Daniel Gershburg agrees, but reminds you to move back into your home. “You mentioned that you moved in with your girlfriend and right now you’re renting this property,” he says. Big no-no. A trustee overseeing the case may have an easy time stating that because you moved out, this house is no longer your private residence and therefore they can take any equity you have in it.”

But if your home is underwater, that is if you owe more than it’s worth, he suggests walking away from your house by filing for bankruptcy. “You can protect around $12,000 in cash these days even if you file for bankruptcy,” he says. “So you’re throwing good money after bad.  That savings could help you out if you need to rent a place, or buy food and clothes. Save your savings.  Stop paying ridiculous interest on a property you likely won’t be able to afford.  Walk away and you’ll feel 1,000 times better when the process is over.  Then take your girlfriend out to dinner — on your debit card.”

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    • I don’t know where to begin.In 2004 my husband rinneafced our home. We at the time had good income. We are now both out of work, he due to brain injury me both retired and suffer from chronic pain. We had a good savings and were doing all the right things then he had his injury and no matter how prepared you are, well you never are. We have a balloon payment due in September of about $235000. and a line of credit for about $140000.. We have been turned down twice for modifying our loan to a payment we can afford. I have been on this property for 65 years and have always paid my bill and taxes. We live on $2000. per month and that is why we can not secure financing. I am not prepared at my age to just give it up. I s there some way for me to secure financing and stay here in my home.There is so much pain and suffering in our lives this just adds to it. Feels like I failed.Margie

    • what a shocker – bankruptcy attorneys suggesting you file bankruptcy! dont we see that on billboards every day? how long do you believe you will be out of a job? because bankruptcy will screw up your credit for YEARS. that means IF you can get a loan for anything afterward (you’ve heard credit crunch a million times I’m sure) it will be at a premium (high) rate. think your interest rates are astronomical now? please talk to a financial planner before you listen to any of this advice. please. your decision on this will effect you for the next 10 years at least. bankruptcy is like a bad hangover that never goes away.

About Pay Dirt

  • Pay Dirt examines the millions of consumer decisions Americans make every day: What to buy, how much to pay, whether to rave or complain. Lead written by Quentin Fottrell, the blog examines these interactions, providing readers with news, insight and tips on shopping, spending, customer service, and companies that do right – and wrong – by their customers. Send items, questions and comments to quentin.fottrell@dowjones.com or tweet @SMPayDirt.

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