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Bankruptcy: Florida Bankruptcy Law
Don't File Bankruptcy Just Because You Are Liable For Upside Down Mortgage
By Jonathan Alper
Over the past few years I have on several occasions listened to other debtor?s trustee examinations during which the debtor stated that the reason they filed Chapter 7 bankruptcy because one or mortgages was upside down and they feared a deficiency judgment. In none of these cases had a mortgage lender actually obtained a deficiency judgment or even made a motion for a deficiency. The debtor simply was concerned about the liability owed to the mortgage lender because the mortgage balance exceeded property value, and the debtor assumed the lender would sue for the difference.
These people should not be filing bankruptcy unless they have creditor problems other than an upside down mortgage. Their mortgage lender may never sue for deficiency, or if the lender does sue, it may not pursue collection. Bankruptcy is a last resort that should be used only if a mortgage lender is aggressively pursuing collection of a deficiency judgment. Once you?re in bankruptcy you cannot change your mind.
I believe that some bankruptcy attorneys may be encouraging Chapter 7 bankruptcy filing by clients who are scared about their potential deficiency liability. If so, these attorneys are making poor recommendations either out of ignorance or to earn more bankruptcy fees. Don?t fall for it. I frequently get calls from ?prospective bankruptcy clients? who state that their only problem is an upside down mortgage. I tell such callers that bankruptcy is not appropriate, but I also offer the client to counsel them about their mortgage problem (for a much lower legal fee).
Don?t tell me that bankruptcy attorneys are filing petitions for the upside down mortgage borrower to avoid income tax liability from a 1099 when the mortgage company writes off the debt. There is not tax issue for a primary residence. Imputed income from investment property is sometimes offset by associated losses (see your CPA), and you don?t need to file bankruptcy to get the ?insolvency exemption? because insolvent taxpayers get the income exemption whether or not they actually file.
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