Filing Bankruptcy May Be the Best Way to Deal with Your Delinquent Mortgage Skip to main content

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Filing Bankruptcy May Be the Best Way to Deal with Your Delinquent Mortgage


Are you hopelessly behind on your mortgage payments and wondering what to do about it? People in your shoes typically do one of three things: (1) try to convince the bank to just take whatever the property can fetch on the market (a "short sale-); (2) just let the bank foreclose; or (3) file bankruptcy.

Many people see filing bankruptcy as the "last-resort- of these alternatives. This is a mistake. Being seriously delinquent on your mortgage carries significant, long term risks that run far deeper than just losing your home. In many cases, filing bankruptcy will actually be the best and most efficient way to manage these risks and get past this difficult episode in your life.

Consider this: if you try to convince the bank to take a short sale or if you simply wait for it to foreclose on the property, you'll likely have to wait months and months for anything to happen. These days, banks are just sitting on their duffs when it comes to the delinquent mortgages on their books. They're swamped with past-due accounts and have little incentive to act since they're just going to take a loss at the end of the day. While the bank sits around doing nothing, you'll continue to be stuck in a frustrating financial limbo. As the months drag on, the delinquent payments, late fees, and compounded interest will keep growing -“ along with your sense of desperation -“ and your credit rating will sink further and further down the tubes.

What's more, if you go the foreclosure route, the bank may be able to sue you for the remaining balance on the loan after the foreclosure sale. And, even if the bank cancels the debt, the saga may still continue. Canceled debt is normally treated as "income.- While the federal government has amended the federal tax laws to allow people to exclude such debts from their income through 2010, many states have not followed suit. If you live in one of those states, you'll likely have to pay income tax on the amount of the canceled debt. The same situation applies in the context of a short sale -“ the debt the bank cancels after the sale is considered taxable income.

Now let's consider what filing bankruptcy can do for you. If you file under Chapter 13, you could actually save your home. Your missed payments will be spread out over a 5 year repayment period. As long as you continue making your plan payments, the lender can not proceed with foreclosure. And, if you owe more on the home than it's worth, you may be able wipe out those burdensome second or third loans that make the property "upside down.- While a Chapter 7 bankruptcy can't stop a foreclosure, the automatic "stay- against collection activity will at least temporarily remove the threat of foreclosure, giving you more time to work out an alternative.

Even more, whether you file under Chapter 7 or Chapter 13, you'll address all of your outstanding debts -“ not just your delinquent mortgage. Chances are, you're dealing with other unmanageable debts -“ like credit card debt that you've been forced to rack up in your efforts to pay the unaffordable mortgage. Bankruptcy can wipe out these debts -“ for good. It will also protect you against liability for any deficiency on the loan, as well as tax liability for any canceled debt. And, as soon as your case is over, you can start over with a clean slate.

So if you're dealing with a seriously delinquent mortgage, don't just wait around hoping the bank will do something. Act now, and take control of the situation. Call a bankruptcy attorney and learn how the bankruptcy laws can help you resolve all of your unmanageable debts. The sooner you file, the sooner you can start rebuilding your credit, and your life.

In North Carolina, contact The Law Offices of John T. Orcutt, with convenient office locations in Raleigh, Durham, Fayetteville, and Wilson. Call (toll free) +1-919-646-2654, to set up a free, confidential debt consultation. Visit for more information.

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