Save your home from foreclosure: the rest of the story

I wrote recently about how one might save their home from foreclosure through a Chapter 13 bankruptcy. There is another side to that story. Chapter 13 will not help everyone keep their home. One of the issues I spend considerable time talking to my clients about is whether they can actually afford to keep their home no matter what they do regarding debt relief.

One’s home is nearly always the single largest expense that one has. Nearly everyone I know who buys a home purchases one that is the most they can possibly afford and then some. I know when my wife and I purchased our first home several (don’t ask how many) years ago, our realtor pointed out how our earning capacity would only increase and how we would get a tax break by deducting the interest paid. He was wrong about the tax break because the interest paid was so little, but that is beside the point. He was right about the earning capacity part, but it sure made for some really tight early years. Anyway, most people overreach a little when they buy a house.

So, the question becomes how much of an overreach are we looking at. To answer this, it is important to give your bankruptcy attorney a really good idea of what your monthly expenses are and definite numbers on what your income has been. I say a good idea of expenses because I have found that no one really knows how much they spend on things and most people tend to underestimate their expenses. Also, there are many annual expenses, such as taxes on cars and tax preparation costs, that many people forget to divide by 12 and put down as an expense in their monthly budget. The income part should be readily traceable though.

Anyway, if after crunching these numbers you still do not have enough to both maintain your ongoing monthly house payment, pay your monthly bills and expenses, and make a Chapter 13 payment, then you are better off surrendering your home from the very beginning. I know this is incredibly hard for people because owning their own home represented a dream and holding onto it gives a sense of security. Unfortunately, that sense of security may end up being incredibly expensive and ultimately elusive.

I have seen folks try desperately to hold onto their house by dipping into retirement reserves and cutting other expenses down to the miserable point to make the monthly house payment, only to see those payments disappear into the bank’s vault and their home still end up on the auction block. That is indeed too high a price. So, even though they do not like to hear it, I sometimes must tell folks that keeping their home just is not in their budget. And that is the rest of the story.