Home value too high

[moses911]

Hello,

We are planing to file chapter 13 jointly in couple of months. We live in michigan and below is the current situation:

1) All of our debts are credit card debts
2) We have 2 cars which we are current on payments and we plan to keep
3) We are current on our Mortgage and currently we owe 170,000 on the mortgage
4) The federal Home exemption for filing jointly is 47,000
5) The home will most likely value at 300,000

Given the above facts 300,000 - (170,000 + 47,000) = 83000 to pay back

We can only afford 700 a month so that leave us in 60 months = 42000 paid so we will be short by 41000

Does that mean we will lose our home and we can't protect it in Chapter 13? Any member went to similar issue before?

I'm unable to sleep over this.

Thanks many

[justbroke]

Are you saying that your issue is that your credit card debt, your only debt, is over $47K? The problem will be that you'll likely be in a 100% plan which means you'll have to pay back everything (under $83K).

Have you considered a cash-out refinance? Of course you will need to run all your numbers backwards and forwards to find the best financial decision. A cash-out refinance may not be the best decision, but losing the house from a forced sale may be a worse outcome.

What's your real pressing financial issue right now? Are you late on any payments to creditors? Are your mortgage payments up to date? What's the principal reason for a Chapter 13?

[moses911]

Thanks for your reply unfortunately our total credit card debt is about 190k combined so 100% plan is not feasible

My wife is late on her payments and I have couple of credits late on. My mortgage payment is up to date.

The principal reason for filing chapter 13 is to save the home and get ride of 190K credit cards debt. I'm on the high income and don't qualify for chapter 7.

[justbroke]

Thanks for your reply unfortunately our total credit card debt is about 190k combined so 100% plan is not feasible

That's a lot of credit card debt. I owed $120K to AMEX alone (plus five other $10K+ credit cards)... so you topped mine.

You should consult with at least 3 and as many as 5 local bankruptcy attorneys to get their take. I'm thinking that you are going to have to pay whatever your (Chapter 7) liquidation test reveals. This may be the $83K of equity that you may have (give or take). You may be able to propose a balloon plan where you make payments over the life of the plan and then pay a lump sum near/at the end.

You would only be able to determine what you could "afford" by going through the means test and completing Forms I/J to determine the Chapter 13 allowed expenses. Let's say that comes back with a disposable monthly income (DMI) of $700. It is likely that you would need to pay the $700/month and still propose a balloon at the end to equal your ~$83K of equity at time of filing. That could mean a cash-out refinance near the end for the remaining $55K+ (adding the often forgotten Trustee's fees of 10% on the whole thing of over $8K).

That's if you want to keep the house.

[moses911]

Thanks for your prompt reply. Can they use my 5000 tax refund every year in this equation? this way we will have 5*5 = 25k at the end of it.

Also can't they deduct the cost to sell the house from the 300,000?

The 190k of debt is combined between me and my wife

[justbroke]

Thanks for your prompt reply. Can they use my 5000 tax refund every year in this equation? this way we will have 5*5 = 25k at the end of it.

The 190k of debt is combined between me and my wife

Your $5K tax refund will be taken as "extra" towards the $190K total unsecured debt. When you calculate your income (on Schedule I and/or the Means Test) your attorney will typically use your actual tax liability and not what you have withheld. The bankruptcy rules require that your taxes are nearly accurate on the forms so that they can determine your true income and true expenses (yielding your true disposable monthly income).

In some cases, a smart attorney will take your average refund, $5K, divide it by twelve and add it back to your income. This process of adding it back to your income, overcomes the need to surrender the refund each year and provides a clearer picture of your actual income.

In your case, if you had $5K in overwithholding in any given year, the $5K will just be added to the amount you must pay the Trustee. In most Chapter 13s, the debtor is required to surrender ALL tax refunds if that debtor is not in a 100% plan. In some Chapter 13 districts, the Trustee lets the debtor keep "some" portion of the tax refund. This would be clarified in the order confirming the Chapter 13 plan.

[despritfreya]

Simple solution. . . assuming the means test does not impact how much you have to pay over the non-exempt equity:

Plan payments are set at the level Schedule I and J shows and at some point after the 24th month you refinance the home to kick in that non-exempt equity. Not a big deal. If you continue to make mortgage payments timely and make timely plan payments you should be able to refinance two or three years down the road (maybe sooner depending upon the lender and the economy at the time).

If you have an attorney discuss the balloon payment by a refi with him/her. If you don't have an attorney, get one.

Des.

[moses911]

Thanks for the info. So if I understand you correctly then if we can afford to pay 700 a month later on in the process like in 3 years we can refinance and cover the rest that is not covered by the 700 a month.


At least I know i have an option to keep our house. We did talk to an attorney but he is waiting on us to get our SEV (state assessment) on our property and also to get our tax refund so we can protect it.

[despritfreya]

So if I understand you correctly then if we can afford to pay 700 a month later on in the process like in 3 years we can refinance and cover the rest that is not covered by the 700 a month.

Yes, but do the refi as soon as you can "qualify". Followed a case a few years back. Debtor's plan called for a refi to pay off the ex-wife's support claim. Plan payments alone were not sufficient to fund the Plan. Instead of doing the refi quickly he waited until month 60. That brought him to mid or late 2009 and we all know what happened to the housing market. "Equity" gone ='s No refi - no completion of plan - case dismissed - dismissal upheld on appeal.

Des.

[moses911]

The only problem I see with refinance is the interest rate. Currently my interest rate is 4% and I wonder on refinance it it will hit 20% due to chapter 13.

[justbroke]

The only problem I see with refinance is the interest rate. Currently my interest rate is 4% and I wonder on refinance it it will hit 20% due to chapter 13.

If it's an FHA refinance it will be a regular rate (about 3.75%-4%). Rates are likely to go up in the next 2 years so it could be a little higher, but certainly NOT 20% (nor 15% nor 10%).

I say an FHA refinance because you likely won't qualify for anything else in an active bankruptcy. An FHA loan is possible in a Chapter 13 because the FHA rules specifically allow for purchasing and refinancing in an active Chapter 13.

Source: http://www.mortgagenewsdaily.com/mortgage_rates/

[moses911]

Thanks again I was a bit worried about that so I have to do an FHA then. The house market here is very unpredictable so will see if my house really comes back at 300,000 or more or possibly less. Luckily the city appraiser visited my house this month and took some pictures and took measurements so we will have an accurate number i hope.

[leonel9]

Luckily the city appraiser visited my house this month and took some pictures and took measurements so we will have an accurate number i hope.

Just to clarify here: You aren't basing the value of your home by the tax assessed value, are you? Depending on the region, these values are typically not in alignment with appraised values. It may be worthwhile to get a broker's price opinion and/or a full appraisal. Your attorney should be able to tell you what will be an acceptable determination of value in your jurisdiction, though.

[moses911]

In Michigan we receive a notice every year which have 2 parts

the taxable value and also the appraised value. The city appraiser visited our house and took measurements. The attorney asked for it specifically.