Can I Get Rid of an Underwater Mortgage If I Don’t Qualify for Chapter 7?

Nancy and Mike Smith: Chapter 13 Severance

Nancy and Mike are a married couple with a household income of $100,000 a year. Their income exceeds the median income for their area, so they are unlikely to pass the means test, even after deducting their expenses. They purchased a home in Naperville, Illinois at the height of the real estate boom. Nancy and Mike love that they are within walking distance of the Riverwalk and Downtown Naperville. However, their home is now underwater by $200,000. They have two car loans, each with a balance of $15,000. The couple also has several credit cards carrying a total balance of $30,000. Nancy and Mike feel that their mortgage is an unsustainable investments. They are two months behind on their mortgage payments.

A Chapter 13 bankruptcy provides powerful remedies for Nancy and Mike. If Nancy and Mike are willing to cut their losses and surrender their home to the lender, they can surrender the home in full satisfaction of the secured portion of their mortgage. While many lenders do not file a proof of claim for the unsecured portion (roughly $200,000 in this fact pattern), this is not a guarantee. If their mortgage lender manages to prove how much unsecured debt that Nancy and Mike owe, it can file a proof of claim, which means that Nancy and Mike would have to repay the unsecured portion as part of their Chapter 13 plan.

A successful Chapter 13 Severance will result in the individual typically remaining in possession of the property for 12 - 14 months with no negative reporting on the credit report as all liability has been severed. This individual can never be sued for the deficiency judgment as it can never again attach to that individual or that individual's assets as the note which made that individual personally liable is forever eviscerated. All the assets of this individual are forever protected regardless of the amount of income this individual earns or the amount of assets in that individuals control. This is an extremely attractive option for the informed and tool of choice for those looking to move on from an Underwater Mortgage.