Rising Home Prices and Bankruptcy
With the recent news that home prices were rising, the issues facing the average homeowner when they consider filing for bankruptcy are becoming even more complicated. The median home price was up 15.7 percent to $135,025, while closed sales and pending sales also saw double digit increases — up 11.5 percent and 36.9 percent respectively as of February of 2013 final figures. (Source: North East Florida Association of Realtors).
EFFECTS OF RISING HOME PRICES OUTSIDE OF BANKRUPTCY
The most obvious effect of rising home prices is that people purchasing homes now are paying more monthly for mortgage payments, taxes and insurance than previous purchasers. This means less money available for necessities such as food, electric, transportation, etc.
When the last run up in home prices occurred during the years 2000-2006, home equity loans and credit cards were used as additional sources of income by homeowners attempting to keep up with rising home costs and living expenses. The results were disastrous. When home prices fell, the ability to refinance and pay off debt evaporated. Then the credit card debt became too much to sustain and the financial crisis was underway. Bankruptcy filings rose rapidly and millions of families lost their homes.
EFFECTS OF RISING HOME PRICES IN BANKRUPTCY
The most obvious example of rising home prices potentially affecting a person who is looking to file bankruptcy is the potential impact on the ability to strip off a second mortgage. I have previously written about stripping off of second mortgages in Jacksonville, FL bankruptcy:
https://www.planlaw.com/stripping-second-mortgages-in-jacksonville-chapter-7/
In order to qualify for this relief, you must file Chapter 7 or 13 case, have a home with a first mortgage (even homestead property is eligible) and the value of the home must be below the payoff of the first mortgage. Often, a tax value is appropriate to use to determine your home’s value or an appraisal may be ordered to determine valuation.
With rising home prices, this ability to strip a second mortgage may not be available. The value of the home may actually rise over the amount owed on the first mortgage. Until recently, that was almost unheard of in real estate.
The rising home values may also affect the ability to obtain a modification of the first mortgage. When a modification of the first mortgage is attempted, the mortgage company does what is called a “net present value” calculation. If the mortgage company feels that there is more value in foreclosing the mortgage and liquidating the home on the open market, then there may be no incentive to modify the loan and wait to be paid off by homeowner through the modification. The result could be a denial of the modification and foreclosure of the mortgage.
CONTACT US
At Mickler & Mickler, we attend Court and see the bankruptcy trustees and judges in action several times a week. We have the experience to guide you to the right decision about whether to file a case, and if so, what Chapter to file.
Please contact Mickler & Mickler at 904.725.0822 or bkmickler@planlaw.com. We will be happy to set you up a free appointment to discuss your situation and potential solutions.
Bryan Mickler
