Key Mistakes Homeowners In A Chapter 13 Bankruptcy Make

In talking to numerous homeowners in Chapter 13 Bankruptcy I have found the following myths or mistakes to be the most common during my survey. So I wanted to share this information, because I find it very frustrating that even today with so much information available at no charge, that homeowners in bankruptcy are still blinded by these mistakes. Please read these common mistakes that if you avoid, you are guaranteed to save thousands of dollars, clean up your credit and get a fresh start! I urge you not to make these mistakes.

Mistake Number 1: Failure to recognize that Your Home is an asset that can be used as a Financial Tool - that can be used to lower your overhead (ex. Pay off your chapter 13 bankruptcy), save thousands of dollars in interest and fees associated with the bankruptcy (ex. Your trustee monthly maintenance fee) and obtain financial security.

Several times per week, I meet with homeowners with a recent chapter 13 bankruptcy. Frequently, they tell me that they’re reluctant to consider borrowing against their home because they want to ‘save’ their equity. They don’t want to risk their retirement savings, in the form of their growing equity by refinancing. But they don’t understand the real risk.

While they bring up an important point, I prefer to step back and look at the real risks. In a vacuum, it does not make sense to say something like “I don’t want to increase the size of my mortgage.”

After all, if we refinance the mortgage and pay off the bankruptcy debts, we’re not creating more debt even though your mortgage balance increases. We’re simply restructuring the ‘bad’ bankruptcy debt by paying it off with ‘good’ mortgage debt.

So at the end of the day, the client still owes roughly the same amount as before the restructuring, but now it’s in the form of mortgage and the payments are less…and frequently tax-deductible ,unlike your bankruptcy payments. (Consult your tax advisor!). Isn’t that more important than a half-thought fear about increasing a mortgage?

So what is the real risk? Typically, Chapter 13 homeowners have very little savings and a lot of debt. Let me ask you - what would happen if you had to stop working because of an injury or sickness? Are you putting anything away toward your children’s college education? Or have you given any thought to your retirement plan?

If you have little to no savings, your retirement plan is doomed! You’re going to work until you die unless you do something to grow your assets fast!” Sometimes, the risk of doing nothing outweighs all the other risks.

Mistake # 2: Thinking that Your Credit Is So Poor That You Can’t Be Helped.

Many clients come into my office with their heads down and tails between their legs, expecting that they can’t be helped. Sometimes they’ve been to another mortgage broker or bank, had their credit pulled and been told that it’s too low to do anything. They’re depressed. But they are wrong! I can help them!

It’s generally agreed that good credit starts around 680. Frequently, clients in a Chapter 13 have scores in the low to mid 500’s. But this does not matter! Let me explain why.

If you work with a qualified mortgage consultant, you’ll find that you might be able to accomplish your goals despite your "sub prime" score. Because in situations like yours, your history of paying your mortgage and/or your Chapter 13 payments will be a more critical factor in determining what you qualify for. And if you can obtain a program that lowers your overall payments by hundreds or thousands of dollars, that’s what’s most important. You can do this even with a low credit score!

Today, there is a greater choice than ever of programs, such as the famous FHA Loan Program, which is a government backed loan for people with bankruptcies or other credit blemishes.

The bottom line is, if you must weigh the risk of doing nothing versus refinancing, statistics show that 9 out of 10 times refinancing is far more beneficial than doing nothing.