Developing Creative Solutions for Underwater Homes
The housing market faces problems that have reached epidemic proportions.
Foreclosures continue to be widespread. Homeowners who can still afford
their mortgage payments are severely underwater; the balance of their
mortgage loans is greater than the value of their homes.
Nobody is exempt from effects of the current housing downturn. Homeowners
who once had equity in their homes have seen their home values plummet
by tens of thousands of dollars. In some cases, values have declined by
the hundreds of thousands of dollars. Given these dire circumstances,
homeowners and their attorneys have been seeking thoughtful and creative
solutions to this problem.
One Supreme Court case that caused waves in the bankruptcy world and ignited
discussions regarding creative bankruptcy solutions was
United Student Aid Funds, Inc. v. Espinosa. This particular case revolved around a
Chapter 13 bankruptcy in which a debtor was attempting to discharge student loan debt.
Chapter 13 Bankruptcy & Espinosa
During a Chapter 13 bankruptcy, a debtor generally proposes a payment plan
to the bankruptcy court, and after the court approves this plan, the debtor
must make payments under the plan for three to five years - after which
time the debtor is free and clear of his debt.
, the debtor included his student loan debts in his Chapter 13 plan. However,
student loan debt is generally not dischargeable during bankruptcy unless
you can show an undue hardship.
In the case, the debtor properly notified his lender of the Chapter 13
filing and plan. The bankruptcy court confirmed the plan. The lender never
objected. After the debtor made his required payments under the plan,
the student loan lender realized its mistake and attempted to void the
The Supreme Court sided with the debtor, holding that the terms of the
confirmed Chapter 13 plan trumped the Bankruptcy Code's limits on
discharging student loan debt. The Court reasoned that since the creditor
received notice of the plan and failed to object to it, the lender was
unable to object to the debt being discharged under the plan.
The holding in this case has triggered various discussions about how, or
if, this ruling could be used in other areas of bankruptcy. For instance,
this ruling could be useful for consumers who are
underwater on their mortgages.
Consider the following example: An affluent couple named Blake and Crystal
purchased a home at the top of the housing market in 2007 for $1 million.
It is now only valued at $500,000 and the couple still owes $750,000 on
Both Blake and Crystal are doctors, and can afford to pay their current
mortgage payments. However, given how severely underwater the home is
they will likely not see any equity in their home for many years to come.
They will likely pay the value of their home several times over by the
time they pay their mortgage off.
If Blake and Crystal were to use the
Espinosa ruling to their advantage, then they may be able to avoid this result.
For example, they can file a Chapter 13 bankruptcy where the plan proposes
that they surrender their home back to the lender in full satisfaction
of their debt. If the lender fails to object to the plan within the specified
amount of time, then Blake and Crystal will be free and clear of this
underwater home after three to five years - provided of course that they
stick to their plan and make all required payments.
It should be noted that this process is not free from all risk, especially
for the bankruptcy lawyer. For example, a debtor's lawyer has an obligation
to propose Chapter 13 plans that conform to the Bankruptcy Code - which
was acknowledged by the Supreme Court in
However, these concerns illustrate the tightrope that bankruptcy attorneys
need to walk when developing creative solutions that are in the best interests
of their clients. Experienced bankruptcy attorneys know how to perform
their jobs both ethically and competently while zealously representing
If you are severely underwater on your home and are considering bankruptcy
as a possible solution, contact an experienced bankruptcy attorney in
your area to be advised of your best option given your particular situation.