Protecting Your Home — Refinance or Bankruptcy?

Protecting Your Home — Refinance or Bankruptcy?

By Attorney Donna J. Brooks, Winsted

With interest rates at record lows, many consumers are looking to their homes to pay off credit card and other debt. It can be a very good deal. It can reduce your monthly expenses dramatically. The interest payments are often tax deductible. But a refinance can be a trap for the unwary and can lead eventually to the loss of your home if you don't handle it right. Getting good legal and financial advice before you take this step is a good idea. Refinancing may not be your only option.

Before going into such a refinance, see if you can answer these questions for yourself:

(1) Will I really be able to afford to make these payments? With what I am paying for this refinance, including the points and closing costs, am I really saving money? If your credit is already in trouble, you may not qualify for the really good interest rates, and you may be hit with excessive points.

(2) Will I be able to stay away from my credit cards after the refinance, or am I going to be in the same predicament in a year or two? Once you have used your home to pay these credit cards, there is no going back. Sometimes a better choice will be to eliminate the debt once and for all through a bankruptcy, if that is what it will take to get you back on track financially.

(3) If I am using my home to pay for a car, will I pay more over time for that car because I am spreading out the payments over 15, 20 or 30 years instead of the usual four or five? Will I have a problem in four or five years when I need a new car once again and I am still paying for the old one in my mortgage payment?

(4) Will I be able to have this house paid for by the time I retire? Will I be able to afford to keep my house when I retire, if I still have a mortgage?

If refinancing will not really solve your problem, bankruptcy may be a feasible alternative. It does not have the same stigma it once had, and in many cases, no one outside of your creditors needs to know you did it.

In many instances you can keep your home in bankruptcy. The way it works is this: you are allowed to claim certain property as "exempt." There are two kinds of exemptions, and you get to choose which kind works better for you. The "federal exemptions" allow you to keep equity in a home up to $16,150 each, so for a husband and wife owning property, they together can keep $32,300. The "state exemptions" allow you to keep equity of $75,000 each, but it doesn't work unless all of your credit cards and other unsecured debts were incurred after October 1, 1993. There are other exemptions for other kinds of property as well.

Equity in a home is figured by taking today's market value and subtracting the balance of your mortgage or mortgages. You may need to get an opinion from a realtor. You cannot usually rely on the town's assessment valuation.

If you are current with your mortgage payments, then a Chapter 7 bankruptcy can help you get rid of the rest of your debts, so that you can concentrate just on your mortgage and your normal living expenses. If your house has an attachment or a judgment lien on it from a lawsuit against you, the bankruptcy can sometimes remove that attachment or lien.

All this may seem overwhelming to think about. Which is why it can be a good idea to get some advice sooner rather than later. Then if you still decide to refinance, you will know that you are making the right decision.