Dear Bankruptcy Adviser, After 23 years in good standing with my mortgages, I am in foreclosure. I am 59 years old and ineligible for a modification, as my debt-to-income ratio disqualifies me. My first mortgage is approximately $42,000 and my home equity line is $98,000. In a short sale, my house would most likely sell at $125,000. I haven't paid my mortgage in more than a year. I also have $6,000 in credit card debt and owe the electrical company around $2,000. I collect $650 a month in disability. My credit is ruined, and I do not see anything positive in the future. Can I file bankruptcy, or is it a waste of filing fees? -- Deb
Dear Deb, You may be able to avoid filing bankruptcy. However, I am not sure how you would pay back the $8,000 in credit card debt and utility bills with your current income.
While you could be a perfect "judgment proof" candidate (meaning you are a financially insolvent defendant), in which case there's no need to file bankruptcy because you don't have anything to take, you'll need answers to three questions before making your final decision on whether to file bankruptcy.
1. Are you liable for the deficiency balance on your mortgage? You owe $140,000 on your first and second mortgage (equity line) and believe the house will sell for $125,000. That leaves at least $15,000 remaining after the sale. This amount will likely be even higher after taking into account the cost of selling the house -- escrow fees, commissions, processing fees, etc. You will owe a deficiency balance of approximately $25,000. You could be liable for any remaining balance on your mortgages, depending on the state where you live. Each state has different deficiency laws. That alone could be a reason to file bankruptcy and wipe out that liability.
2. Is your income exempt from creditor claims? Your disability income may be exempt from most creditor claims. I cannot say whether your particular income qualifies for this exemption, but a bankruptcy attorney in the state in which you live should have that answer.
3. Can you live without a checking or savings account? This one will take a bit of explaining. Even if your income is exempt from creditor claims, it does not mean creditors will simply decide to leave you alone. Creditors might still sue you and attempt to levy your bank accounts, in which your account is frozen and all or some of the monies in your account are seized.
You need to answer these three questions then make a final decision. The second mortgage liability probably will help make the decision easier. That information will tell you whether bankruptcy is worth the filing fee.