It can be very difficult to maintain your household expenses when money is tight, and even if you have investments the interest rates are so low that your regular interest income has all but disappeared. Unexpected expenses can be crippling, and you shouldn’t have to decide whether to have your child’s illness professionally treated or to pay this month’s mortgage. Yet that is the exact situation in which many mothers and fathers find themselves.

For many people, their mortgage has become an unbearable expense, and all those dreams and hopes when a new home was purchased have been dashed to nothing for reasons out of their control. The big investors with their fancy flash cars can afford to purchase their mansions outright, but when things go haywire through their mischievous financial dealings they are OK, and it is left to Joe Public to handle the fallout.

Interest rates drop and the money supply becomes scarce. Businesses fail and people lose their jobs – look at Michigan and Detroit in particular – at what happened there with the demise of the automobile industry. Not only the car workers, but every employee working in the support businesses faced redundancy.

In such situations, banks and lenders become nervous, and go by the letter of the law when payments are missed resulting in people losing their homes, when a couple of years back there would have been more tolerance. They don’t know how secure anybody’s income is any more. And some are even making big money now selling Mortgage Protection Insurance.

This is where a mortgage or loan modification can help you. You might have been unable to get refinance or even remortgage, but if you understand how to go about modifying your mortgage loan, then it could make a massive difference to your ability to pay: you might at last get a full night’s sleep, without waking at 3 in the morning full of worry, and being unable to sleep again.

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There three basic ways to go about modifying your home loan:

1. You could approach your bank or mortgage lender yourself and ask them for a loan modification. However, many people feel uncomfortable and far from confident when speaking to bank managers, and as a result they don’t come across well. In any case, banks tend to ignore individual members of the public when seeking any form of financial help: have you ever tried to negotiate a bank loan for a vacation or even to start a new business. This is not even an option for many people.

2. You could spend two or three grand and hire a specialist to arrange your home loan modification for you. These experts are really good, but if you are struggling to pay your mortgage and feed the kids, where on earth are you going to find a few grand? You have no chance of a loan, because by now your credit might be shot, or your home could even be in negative equity, meaning you owe more on your mortgage that the property is worth. It is an option, but not for everybody.

3. You could do it yourself the proper way. If you are contacting your mortgage provider you have to know the correct way to do it, and what your rights are and are not. You could be successful in lowering your principal or with some other modification that makes your mortgage repayments more affordable for you.

Option 3 is usually the most attractive to most people if they cannot afford option 2. It is important, however, that you know how to fill in the correct forms, how to give the lenders the exact information that they want, and how to speak to them confidently and negotiate with them to get what you need.

A lot of this information is available online, but you can’t substitute for knowledge and experience, and what you really need to guarantee success is the help of people who are experienced in loan negotiations, and pass on that experience and ability to you in your efforts modify your mortgage loan.

A mortgage, after all, is nothing more than a loan that is secured against the value of your property. The money borrowed is used to purchase your property, and you pay the loan back plus interest through agreed monthly repayments.

The deeds are held by lender, so the property technically belongs to them. If you cannot meet these repayments, the house is sold to recover the sum borrowed. The lender is not interested in making further profit, so the house will be sold as soon as the sum offered reaches the amount owed.

This must be avoided at all costs, and a loan modification is the way to achieve that. There are certain steps to be taken and procedures to be followed, and by being provided with the correct documents to fill in and the right way to approach the entire process, you will have a very good chance of success.

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If you miss a mortgage payment, your lender can legally foreclose. The foreclosure is not exactly a closure of the mortgage, or the enforced sale of your home, but has a more specific legal meaning. When you find yourself unable to meet your mortgage repayments for any reason, you can apply to an equity court for what is known as an equitable right of redemption.

This gives you the legal right to retain your home by paying it in full after missing one or more repayments. How you are going manage to do this if you cannot even make your monthly payments is another question, but your mortgage lender will want to try to avoid it. This is because it might preclude them from selling the house to regain their loan, so they will first apply for a foreclosure of this ‘equitable right of redemption’, which in effect takes away all of your legal rights to your home.

In other words, the home is no longer yours, and the lender can now sell it to recover the mortgage loan. The ‘foreclosure’ then, is not the foreclosure of your loan as such, but of your right to pay off the balance of your mortgage loan in a lump sum and keep your house. Once it has been granted, your home is no longer yours, even if it has not yet been sold.

There would appear to be few defenses against this, though the Truth in Lending Act is one that has had some success. If you can prove that the loan agreement did not detail the repayment schedule properly, or did not define the interest rates payable, for example, you could successfully bring a case for the loan to be rescinded. It is believed that most mortgage agreements contain breaches of the law in some form or other, and that it is up to you or your advisor to find the fault in yours, and determine if it can be grounds for defending a foreclosure.

However, the buzz defense at the moment is the ‘Produce the Note’ defense, where the defender challenges the mortgage lender to produce the original signed agreement that the money is in fact owed. If you deny owing the loan, then the burden of proof lies with the lender to prove that you do. This would normally be by production of the agreement, or promissory note you signed when taking the mortgage.

The question is whether this is an urban myth, or whether it has basis in fact. There are no doubts that over the past few years a large number of mortgages and other loans have changed hands, and been bought and sold and that somewhere along the line the original documents have gone missing or been mislaid. If the original Promissory Note was among them, then the lender has no proof that you actually owe the loan.

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Sounds great, but actually, there may be other burdens of proof that the lender can provide to satisfy the courts. One example is the mortgage form itself, which is also signed by the borrower, although such a defense against foreclosure could have two effects:

1. It could delay the foreclosure, and

2. It could prompt the lender to agree to a loan modification so that the borrower can keep hold of their home, while paying a lower and more affordable monthly sum.

There is actually no evidence on the internet that the ‘Produce the Note’ defense has ever worked to have a loan rescinded or a foreclosure refused, but it has frequently caused delay and a restructuring agreement as described above.

Such modifications could involve reducing the monthly payments through an agreed lower interest rate, an extension of the mortgage period or even a reduction in the capital sum owed. Once the borrower is back on track with the reduced payments, the foreclosure will be forgotten, although these new payments would have to be maintained without a single missed payment.

This defense appears realistically to be more of a stalling tactic than the wildly successful defense claimed, but it could give a few borrowers the shivers, and is attracting a lot of interest among borrowers. It is not, however, and probably never will be, a proper defense to a foreclosure or a defense that will result in any mortgage loans being annulled. At best, it will either delay the inevitable sale, or prompt a few lenders to agree to a loan modification rather than face having to prove their rights to force a foreclosure in court.

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It is very easy these days to get into this position, particularly if you have purchased your dream home during a period of low interest rates. A 4% interest rate can rapidly rise to 14% after a recession, and during a boom period, and that change would have a profound effect on your mortgage repayments, particularly if your agreement has no protection from this. A $150000 loan would increase by $125 a month for each 1% increase in the interest rate.

A short sale is a means of paying off part of your mortgage debt through an agreement with the lender that you sell the home for less than the amount still owed. This means that you would likely have negative equity, and cannot sell at a profit. It will be permitted only if the lender feels that the money they would be receiving from the sale is sufficient o make it financial good sense when they take the costs involved in foreclosing into account.

You cannot just carry out a short sale and expect the lender to agree to it: your mortgage lender holds your deeds, and will not agree to any sale that makes less than the amount still owed to them unless you have applied through the correct channels. There is a procedure to follow for short sales, and you also have to be very careful that the agreement involves absolution from paying the balance. Agreement to a short sale does not mean that the lender agrees to recognize the sum paid as settlement in full, and you could still be liable for the shortfall.

You should negotiate the sale in such a way that the lender accepts the proceeds as settlement in full. You will get nothing other than being free of your mortgage, which should be sufficient benefit to you when you consider the alternatives. You will also have to prove penury, with no cash in the bank, investments to sell, other properties, or even a flash car that could make up the difference. However, there are alternatives to short sales if you can get them.

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One is to rearrange your loan. If you cannot manage your repayments, the sooner you recognize and admit this the better. Too many people ignore the matter until it is too late to do anything, yet there are things that can be done to help you keep your home.

You can modify your interest rate, for example, and get an agreement to pay a lower interest rate now, and a higher rate later when you have more disposable income. This could be enough to enable you to keep paying. You could also have a modification made to the capital: some mortgage lenders will agree to reduce your capital and render your mortgage much more affordable. They do this because it is preferable to them than the high legal costs of going through the courts to repossess your property.

Another option is to come clean with your lender. Tell them you are in difficulty and ask what they can suggest. It quite possible that they will offer you an alternative arrangement that will allow you to pay what you think you can afford. They might convert the loan to interest only for a while, and possibly extend the term so that your repayments are less.

If you are otherwise solvent, however, they might be less understanding, so if you own thousands in stocks and other investments, realize these first or you could find your home repossessed. Your lender is not on your side: they only seem to be because they are working out what is best for them - not for you.

In a way, this is the same as a mortgage modification, and it is of extreme importance that you understand that you must stick to any agreement you come to. You will not be given a second chance. Every one of these is better than short sales, because with these you keep your house - with a short sale you do not.

So, if you ever feel that you are rapidly approaching a situation whereby you will find it difficult to meet your mortgage repayments, just remember that short sales are only one option, and one to be avoided until nothing else is possible. With this agreement, you lose your home. With most others you can make, you do not. Think about it and be proactive.

Don’t leave discussing your problems with your mortgage lender until it is too late - or a short sale will be too late for your dream home.

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Short sales are permitted by mortgage lenders when they feel that the chances of them receiving full payment for a mortgage loan are small. They are generally agreed to when the borrower has no funds or investments with which to pay the loan, or to meet the monthly payments required. However, before agreeing to such an arrangement they will follow a procedure will involve loss mitigation and careful analysis of your means.

Because of recent financial crises, and the huge number of foreclosures in recent times, mortgage lenders are more willing than ever to come to a short sale agreement in order to recover a large part of their investment, rather than seeing it eaten up in legal foreclosure costs. For many homeowners who have hitherto been unable even to sell their home in order to repay their debt, this is good news. However, there are conditions to be aware of.

All is not as plain sailing as you might believe, because much depends on who else has a claim on your home. There is a hierarchy of claimants, and if you have a second mortgage, or secured loan on your home, Home Equity Line of Credit (HELOC) lenders and others will possible have to agree to the arrangement. Holders of tax liens, such as income or corporate franchise tax, frequently object, and if mortgage insurance was being paid then the insurers might also object, because they might be faced with a claim from the mortgage lender for their loss after the proceeds of the short sale have been paid.

In short, there might be a number of claimants for the proceeds, and they may not agree if they feel they will be receiving less than they are due. Most lien holders are reluctant to forgive loans. That is why this type of real estate transaction has a poor record of success, and why it should be regarded as nothing more than a last resort. Your best chance of success is to have your short sale agreement application made by a mortgage specialist or real estate lawyer, because otherwise your chances of success are low.

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Another thing for you to be aware of is that once you have done all the hard work, advertised the house and got an offer from a potential buyer, the mortgage lender or bank will assess the potential proceeds against what you owe and might not agree to the sale. Everybody that has a financial interest in your home must agree, and if you have taken out loans on your house, and owe money other than your mortgage for which your home could be held as security, you might find problems in short selling it.

Get a professional to help you if that is what you want, but also consider the alternatives to short sales, because there are some that could help you to retain ownership of your home. Although it will not have the same impact on your credit rating as a foreclosure, a short sale will still be recorded a settlement and will remain on your credit report for the statutory period. If you would be requiring credit in the future, short sales are better avoided.

Therefore, if you are having problems paying you mortgage you should first inform your mortgage lender and try to get a mortgage modification, but if you cannot get agreement on that then a short sale might be your only way out of being saddled with debt for the rest of your life. In either of these two cases, a mortgage expert will be able to help you to come to the best agreement with your lender by using their experience and expertise to take you through all of the legal intricacies involved, with a higher probability of success.

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The current recession has proved to many people that they are not infallible, and their safe and secure world is not as safe and secure as they thought. Just like the dotcom collapse gave many people a very nasty shock, the financial frailty of those depending upon stock markets and house prices for their security has finally been made clear.

Unfortunately, those that suffer most are not the ones that cause these problems, but those who were unaware of their possibility. Ordinary people, who have saved hard for a deposit on their new homes, are now finding it very difficult to keep up with their repayments for a number of reasons. They might have seen their jobs disappear as a result of the recession, or the investment income that they relied upon disappearing due to the dramatic interest rate reduction.

For whatever reason, they need help, and that help could me a mortgage loan modification that can reduce their monthly repayments. Lenders tend to be very unfeeling - they cannot afford to be - and will foreclose on any mortgage that falls behind by a certain amount. Many do their best to help, but in the final analysis, if a person is unable to pay the basic mortgage, they are not going to be able to afford an increased amount to cover their regular payment and the arrears.

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The ultimate result is pretty obvious: repossession. In fact that term is a bit of a misnomer, because the buyer does not in reality own the property until they have paid for it. The lender holds the deeds, and the lender can and will sell the house if the borrower breaks the contract. The owner need not expect any money back, because the lender can legally accept the first bid that reaches the sum owed. That is all they are concerned about - recovering their capital.

So, how do you get a loan modification, and what can it achieve for you? First of all let’s look at what it actually is. A mortgage loan modification can take one or more of several forms. It can reduce the interest rate, so that your monthly repayments are less, and the same outcome can come as a result of reducing the capital owed. Lenders will do this rather than foreclose if they feel that foreclosure would not be to anyone’s benefit.

You could also be permitted to miss a few payments, and make these up towards the end of the loan period. This would be done if your financial situation was temporary, such as when you are seeking employment, or temporarily ill and on short wages. The term of the loan could be increased, meaning that you will pay more interest overall, but that your monthly repayments would be reduced. Finally, the mortgage loan can be refinanced, and also if your employment circumstances change and you are earning less than a certain level, you might be able to change your loan to a subsidized one.

As you can see, there are several options available, and you could really do with the services of an expert. Many people, get over-nervous when taking to a bank manager, and banks have a tendency to ignore individual members of the public when discussing financial matters. They might listen to a qualified representative, but not to you. The same is true of many mortgage lenders.

The best way to discuss a mortgage loan modification without paying a few grand for a trained representative, is to do it yourself, but armed with all the right information. You must submit the correct modification application forms and understand the jargon and terminology involved. You will also have to be confident in speaking to the lender, and be able to discuss your financial options authoritatively.

Not all of this is easy to do, but given the right training and information you will be able to personally negotiate a successful mortgage loan modification. One of the secret is knowing what is possible, and to what options lenders might be willing to agree. Half the battle is knowing and understanding the proper application procedure, and then how to negotiate and talk to the lender in their own language. If you get their respect of your knowledge, then they are more liable to offer you what you require.

At the end of the day, it is not in their interest in foreclosing your loan because this could involve them in a fairly high cost: a cost that could higher than that involved if they reduced your principal amount, or your interest rate. It is worth while learning how to save your home with a loan modification, because it will mean not only that you save your home, but also you are paying less to pay for it. That is worth whatever it takes for you to find out how.

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There are many reasons for this happening, although a common one is that you love your new-found home so much that you persuade yourself that you will cut down on this, and stop that (such as quit smoking) and you will easily save enough money each month to make the repayments. However, no matter how well intentioned you were, it just doesn’t happen. This doesn’t get cut down, and you don’t quit smoking, and you suddenly find that your dream has turned into a nightmare.

Another common reason is purchasing your home when both house prices are high and interest rates low. One frequently leads to the other: People tend to pay more in capital for their home when associated mortgage interest payments are low. The time comes when interest rates increase, and prices drop, so that not only do you have to pay more each month, but also you could end up with negative equity: owing more on your mortgage than the house is worth at the time.

Sure, times will change, but you might not have long enough to wait. You can’t get a loan on your home to help you through the bad times, because you have no equity, and your repayments have increased to a level that is severely straining your finances. Oh, for some way to reduce your monthly payments to help you out.

Don’t worry - you are not alone. There are many like you, and thankfully there is a possible way out of your predicament. However, it is a way that the banks don’t generally want to discuss with you, so you have to know how to negotiate it. It is called a loan modification, or in your case, mortgage loan modification.

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A mortgage is nothing other than a cash loan, with your home placed as security. If you fail to meet the repayments, your house will be repossessed by the lender and sold to pay off the loan. They are not interested in making profit on such sales: they will sell as soon as they get a bid large enough to pay your loan, so even if you could have sold it yourself for a lot more, they aren’t bothered. They get their capital back, and you get nothing.

So, please look upon your mortgage as a loan. May people regard their mortgage as something special, and while to them it may be, to the lender it is just a loan of money to enable you to purchase your property, with that same property as security. That’s why the lenders will keep the title deeds until you have paid it off.

You could try to negotiate a mortgage loan modification with the bank yourself. Most people, however, are far from confident negotiating with their bank manager, or even a building society or private lender. They don’t know the jargon, and they get exceedingly nervous. Not only that, but banks generally don’t discuss such things with individual members of the public, and might make a few sympathetic noises, and then sell your house!

You could hire a specialist, but I am pretty sure that if you had the spare couple of grand that they will charge, then you would have used it for your monthly payments. That’s another of those life’s paradoxes - you need a lot of spare cash to pay a specialist to deal with a problem caused by your (let’s face it) poverty. It ranks alongside not getting a loan unless you are solvent enough not to need one!

The third method is to do it yourself, but unlike the first option above, armed with the right information and the right forms. Yes, forms. If you have the correct forms properly completed, and know the information that your lender wants in order to be able to agree with your request, then you have a chance of success. Otherwise forget it. You’ll be sent on your way with your tail between your legs.

However, with the right forms, and the confidence that comes with knowledge and knowing the right questions to ask, and points to make during your negotiation, you are very likely to be successful, and leave the building, not with Elvis but with a mortgage loan modification. Not only will that save your home, but it will save your credit record which is probably equally important these days.

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Let’s look at the last question first, and why it is an important one to answer before considering your options. People get into difficulties with debts such as credit cards, loans and mortgages for a number of reasons, the most common being unexpected changes to their ability to pay. Examples of that are redundancy and job loss for other reasons, wage reductions and additional commitments. None of these their fault.

None of these are uncommon in today’s financial climate, and not only are businesses closing down every day, with consequent loss of jobs, but others are reluctantly accepting lower pay while others are borrowing increasing amounts of money to make ends meet - with the obvious ultimate results. The outcome is that an increasing number of people are experiencing difficulties in meeting their mortgage repayments, and their homes are consequently at risk of foreclosure.

What is Foreclosure

Foreclosure is where mortgage lenders, such as banks and building societies, request the courts for foreclosure of your ‘equitable right of redemption’, meaning your right to repay the loan in full after missing one or more payments. Once this has been granted, your legal rights to your home are over and the lender can sell it to raise the cash to repay the mortgage loan.

The proceeds go first to the mortgage lender then to any other lien, or secured loan. You get what is left. This can be a severe blow to you, particularly if you have been paying for several years, and then find yourself missing a payment through no fault of your own. You could owe very little on your home, yet still face foreclosure. The equity would be of little use to you since you would be unable to purchase a similar home for the same money.

What you must to avoid this is to be proactive, and inform your lender of your difficulty. However, this has to be done very carefully because that could prompt them to foreclose on your first missed payment, so speak to a professional mortgage or loan advisor before doing so. Your options are:

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1. Loan Modification

A loan modification is an agreement between you and the lender to change the terms of your loan. Although foreclosures are becoming more common, the conditions which led to your financial difficulty are generating an increasing number of defaulters, and lenders are becoming more amenable to rearranging the terms of your loan.

To be successful, you will have to apply using the proper loan modification form, and understand the right way to speak to your lender. If you learn the correct way to conduct your application then you will have an excellent chance of success, since the very conditions that has led to the situation has also bred a willingness on the behalf of the lenders to come to an agreement.

The modification can save you a lot of money on monthly repayments, and can include such restructuring as an agreed reduction in your capital, a reduction in your interest rate or an increase in the length of time you have to repay. Each one of these will result in a lower repayment rate, and enable you more likely to be able to meet your monthly commitment.

Make sure that you take the advice of professionals in the correct application procedure for a loan modification because this can save you many thousands of dollars, not to mention your home.

2. Bankruptcy

Filing for bankruptcy might seem an extreme solution, but it can be done and you still keep your home. The Bankruptcy Code contains two Chapters relating to individuals, each of which can be used to your advantage. The first is Chapter 7, and used when you have no equity on your home. In effect, you are declared completely bankrupt and in liquidation.

However, because you have no equity on your home, there is little point in the lender repossessing it if you can keep up with your repayments. The advantage comes when you have a number of other debts, such as credit card debts, and if your utility services have been disconnected. By becoming bankrupt you can keep your house, as long as you meet the repayments, but your other debts, with a few exceptions, will be written off.

These exceptions include up to 3 years of unpaid income tax, student loans, and some others, but you get your credit card debts cleared and your utilities restored. If you have equity on your home, however, you lose it. It will be repossessed and sold, the proceeds paying your mortgage and secured debts, and the rest shared between your other creditors. In this case you should file under Chapter 13.

Chapter 13 promotes rearrangements of your loans to enable you pay them more easily. Loan modifications can be used to make a massive difference to the amount you have to pay, as explained above, and you can save your home as long as you meet the revised repayments.

As you can see, then, there are alternatives to foreclosure, but you have to know how to get them, and that is where you require a mortgage loan specialist to help you.

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When you take a mortgage loan to purchase your property and then fail to make your payments, the mortgage lender can try to repossess the house in order to sell it and redeem their loan. However, a ‘court of equity’ can grant you what is known as an ‘equitable right of redemption’, meaning that you keep the house if you repay the debt.

Often this is not possible, but it can sometimes be possible for the borrower to raise the funds to pay off the mortgage, particularly if it is reaching towards the end of its term and there is not a lot left to pay. That is when their equitable right of redemption is important, and when lenders might try to force a foreclosure through the courts, removing any interest the borrower has in the property. The lender can then sell the property and the proceeds are used to pay the loan, any excess going to borrower.

It can be confusing to believe that a lender can pay off the entire loan while being unable to meet the monthly repayments, but they could do so by taking, for example, a secured loan on the equity, if it is sufficient, though you must wonder why they did not do that before foreclosure was a possibility.

The term therefore means more than just a forced sale, but to legal appropriation of a property with the mortgage payer have no further legal right to it. If the sale of the property does not realize sufficient funds to repay the entire loan, the lender can then sue for the balance.

A foreclosure is therefore to be avoided at all costs, particularly if the majority of the loan has been paid, since the borrower is left without a house, and even if there is a large part of the equity left over, it would generally be insufficient to purchase an equivalent property.

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There are two main types of foreclosure with the USA: a judicial sale and power of sale, although there are others that are applied in individual states. Let’s look at both of these two above.

Judicial Sale

In a judicial sale, also known as a judicial foreclosure, the court supervises the sale of the property, with the proceeds being shared first to the mortgage lender, then to any other secured loans and finally any excess going to the borrower. You would be notified of the court hearing, and its decision is normally announced after a hearing in a local or state court.

Power of Sale

A power of sale is enabled if such a clause was included in the mortgage, or if a Deed of Trust was used. A deed of trust contains a named trustee, independent of the borrower and lender that can order a sale of the property in the event of default. There is therefore no need for a court hearing, and the sale can occur very rapidly after the defaulting of a payment. The proceeds are apportioned as above, as with the judicial sale.

Acceleration Clauses

Acceleration clauses permit the mortgage lender to demand the full amount owed in the event of one or more payments being missed. Thus, if you take a mortgage for a certain amount, and there is an acceleration clause in the mortgage agreement, you may be asked to pay the full amount immediately if you miss even one payment. Such a clause is now very common, and provides protection to the lender against bad payers.

How to Avoid Foreclosure

If you feel that are in a position that you might not be able to meet your regular payments, it is useful to know how to avoid foreclosure. There steps you can take and it is wise to take the advice of a mortgage expert on this.

One popular solution is to apply for a mortgage loan modification. Such an application has to be made officially, using the correct forms, and you have to know how to negotiate with your bank manager or lender. Most people get nervous when talking to bank managers, and so need expert help. However, if done properly, an application can very frequently result in the modification of a loan to reduce your monthy payments.

Possible ways of doing this are reductions in the interest rate and also a reduction in the capital owed. The term over which your repayments are to made could be extended to reduce your monthly payment, and the success rate of modification applications is so high that this is a very viable means of preventing a foreclosure and saving your home.

This is particularly so in the current economic climate, where an increasing number of people are defaulting on their payments, and the price of housing is consequently reducing. Lenders are no longer so keen to foreclose, and will offer you alternative means of repaying your loan. Foreclosure is not yet a thing of the past, but there are now more ways of avoiding it than ever before if you speak to the right advisors.

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Although bankruptcy cases are filed and tried under federal law, some property rights such as exemptions come under state law. Exemptions are what protect your property from creditors, and can have a significant part to play in bankruptcy cases, so it is not always safe to generalize, but the following is basically true across the USA.

Chapter 7 involves liquidation of assets, and is preferred where you have equity on your home and several other debts, such as secured or unsecured loans and credit card debts. This involves the sale of your home and also of other non-exempt properties you own to make initial payment to the secured debts, and the remainder is shared between your unsecured creditors. The remaining debt, particularly of unsecured debts such as credit cards, are written off, although there are some exceptions about which a professional adviser can advise you.

However, if you have no assets at all, and you have no equity on your home once the secured debts have been considered, you are able to keep your home as long as you are able to meet the repayments on the secured debts. That is because foreclosure would provide nothing to the unsecured debtors, and you are already paying you secured debts at the agreed rates, so foreclosure would achieve nothing.

If, however, you have equity, then the home will be sold to provide some capital to share between your other debtors once the mortgage and other secured loans are paid off. Let’s consider an example.

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If your home is currently valued at $150,000 and the balance of your mortgage is $130,000 and you took out a secured loan of $25,000 for a new kitchen and outside barbecue area, and it would cost around $2,000 to sell your home, your equity is zero: even less than zero, making it negative. However, let’s assume that you have also extended yourself on your credit cards, owning $20,000 on these.

You are managing to meet your mortgage and loan repayments, but cannot pay your credit card demands. You can file for bankruptcy under Chapter 7 and keep your home, having your credit card debts scrubbed. You can keep your home as long as you keep making your payments. You can even keep $2500 in your bank account, and also your car if it is not too new with a high value.

However, if you had not taken that loan secured on your home before house prices plummeted, your equity would be $18,000 - taking the cost of selling into consideration. You would be forced to sell, and after the secured mortgage loan was paid the balance of $18,000 would be split between your other creditors. That is if the property sold for the market value, which it likely would not.

Therefore, if you have equity you lose your home, and if you have no equity you probably won’t. It’s a strange situation, but one that has been devised to make sure that you pay at least some money to your creditors if you have it. If you don’t have it, your mortgage lender would rather not foreclose due to the costs involved, and would rather come to a repayment arrangement with you. That’s the way it normally works, but there can be exceptions.

So, Chapter 7 is recommended only when you have no equity on your home, otherwise, file under Chapter 13.

Chapter 13 of the Bankruptcy Code involves reorganization, permitting the debtor to keep their home and to employ future earnings to pay off the debts. You are allowed to discuss loan modification with your lenders or come some other repayment deal.

This is your option if you have not taken that $25,000 secured loan, and have equity on your home. You can come to a repayment arrangement with your creditors, but are still not guaranteed to save your house.

That depends on your personal circumstances, and you should really make an attempt to get professional advice on your options. Chapter 7 and Chapter 13 of the US Bankruptcy Code cam help you in certain circumstances, but you need advice on which to choose, or even if bankruptcy is your best option, which in most cases it might not be.

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Although people have had difficulty paying their mortgages and other loans since time immemorial, the past couple of years have been worse than normal. In fact, it was started off by this very problem: those with sub prime mortgages finding themselves unable to maintain their payments, and banks, building societies and other mortgage lenders going bust because of it. This sparked off a recession that led to an unusual number of job losses at all levels of employment, and with an even greater strain on the mortgage lenders.

One of the problems facing ordinary people with debt problems is the complexity of current bankruptcy law, and being unsure as to what the consequences to them would be were they to apply for bankruptcy. The frequent law changes and ways of interpreting bankruptcy law have been confusing to ordinary people, and now there are even more changes being discussed that could very well change the current situation. However, let’s have a brief look at what the law says now.

Many people look upon bankruptcy as being a means of debt management. Changes in bankruptcy law to allow them to retain equity on their car and $2,500 in the bank have rendered it as a perceived means of solving debt problems, particularly since you can’t be fired by going bankrupt and can still keep earning a regular wage. There is a perception, therefore, that you can have all your debts written off, yet still keep your car and your job with cash in the bank.

This is not quite the case, and some of your debts will not change. Thus, if you owe taxes, the past three years are not exempt, and have to be paid, although any unpaid income tax bills more than three years old can be torn up and thrown away. Some taxes and commitments are not covered, such as student loans and liens, and also fiduciary taxes, alimony and child support. You can have credit card debts, fraudulent credit claims, and foreclosure removed, and also have your gas and electricity reconnected along with any other utility that has been terminated.

But what about your home – that is what most people will be interested in. Debt management is all very well, but if bankruptcy means losing their home, many people will think twice about it. A lot depends on whether you are going bankrupt under Chapter 7 or Chapter 13.

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Chapter 7

What Chapter 7 basically states is that if the equity of your home is not greater than the sum of secured loans on it, including your mortgage and any secured loans, plus the cost of selling your home, then, if you maintain your mortgage and loan repayments, your home will not be sold when you are declared bankrupt and you can keep it. Such equity is termed ‘exempt’

The reason for this is that nobody gains by selling a property that would result in no money being available for creditors, other than those that are being paid regularly anyway. Hence there would be no benefit.

If, however, you do have equity over and above the loans secured on it, then your home is liable to be sold and you are advised to file under Chapter 13.

Chapter 13

Chapter 13 involves debt management adjustment, or loan modification. It helps you to work out a repayment plan, so that you can keep your house – but not any equity on it. However, if you sell you lose your equity, so you can’t make money from this.

Chapter 13 allows to you cure any mortgage defaults, and can even write off some part of your debt, depending on your circumstances. There is no guarantee that you will be able to keep your property, but there is a far greater possibility if you file for bankruptcy under Chapter 13 than Chapter7.

Anybody whose debts are so crushing that they are considering filing for bankruptcy as a means of debt management or of clearing all their debts, should first consult an expert in this form of law. There is a significant difference between Chapters 7 and 13, and is critical that you use the one that is most appropriate for your circumstances. The wrong choice could be disastrous, and the right choice could give you a fresh start whilst keeping your own home.

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