MReport March 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

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44 | TH E M R EP O RT SERVICING THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T A Different Way Forward for Bankrupt Homeowners Borrowers should have more options—here's a potential way forward. By Ed Delgado I t is perhaps the most stressful moment that a borrower can experience: the realization that they are no longer able to pay their outstanding debts and must file for bankruptcy protection. Since 2013, more than 4 million nonbusiness bankrupt- cies have been filed in the United States. The circumstances of approximately, two-thirds of those cases required that the estate be administered by the trustee under the rules governed by Chapter 7 of the United States Bankruptcy Code, which calls for (among other things) liquidation of the person's nonexempt assets. Under the rules, once the debtor (in other con- texts referred to as the borrower) files for bankruptcy all collection activities (including foreclosure of mortgaged properties) must cease. The Problem U nsurprisingly, approximately 25 percent of Chapter 7 bank- ruptcy estates include mortgaged real estate assets that are severely delinquent (more than 120 days) on their home mortgage payments at the time of filing. Despite their delinquency, many times the dis- position of these properties does not take place within the admin- istration of the bankruptcy estate because the property qualifies for the homestead exemption under the rules and the debtor/borrower has a desire to attempt to stay in the home. A borrower that makes a qualified claim of the homestead exemption removes the mortgage form the bankruptcy estate, leav- ing the property exposed to the continued risk of foreclosure. Un- fortunately, despite the borrower's best intentions, their income level is often insufficient to sustain the required mortgage payments on the home, and the result is simply a delay of the inevitable. Further, if a foreclosure has been initiated before the filing of the bankruptcy, many mortgagees can successfully petition the bank- ruptcy court to remove the prop- erty from the estate. One of the primary motivations in removing the mortgage is the reality that the disposition of the property within the confines of the bankruptcy re- quires the trustee to bring value to the estate and by requiring secured creditors to pay funds to the estate at the closing of the sale. The as- sumption is that this process can be seen as a cumbersome task and/

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