Bankruptcy Lawyer Bryan W. Stone answers the question: “Can I keep my house if I file bankruptcy?”
For would-be homeowners who are struggling to secure a loan, seller financing can be an alternate path to home ownership. It can seem like a no-brainer for individuals with spotty credit histories eager to have a house to call their own: monthly mortgage payments directly to the old owner in exchange for the keys to your new home! The bank is cut out as the middleman!
But of course, there are considerable downsides to this practice for potential buyers that should be considered first. One North Carolina couple was recently reminded of this when the federal 4th U.S. Circuit Court of Appeals upheld the terms of their seller financing contract against them.
Danni Jernigan and William Anderson bought their home in Raleigh in 2011 through a $255,000 loan through the house’s previous owners, the Hancocks. The terms of the couples’ promissory note were thus: the buyers would make monthly payments to the Hancocks over a period of 30 years with a five (5) percent interest rate. In the event that Jernigan and Anderson fell more than 30 days behind in payments, they would be in default, at which point the interest rate would jump to seven (7) percent and the Hancocks would have the right to call for the immediate payment of the new buyers’ remaining principal balance.
Although these terms may seem overly harsh or unfair to the buyers, seller financing generally permits the inclusion of such terms. The parties are free to handcraft their own unique terms for what happens if the new buyers default on their payments, largely in part because seller financing usually involves buyers with shaky credit histories.
After two years in their new home, Jernigan and Anderson defaulted. The Hancocks foreclosed on them when they missed further payments, something the seller also has the power to do in seller financing scenarios. Jernigan and Anderson filed for Chapter 13 bankruptcy protection at that point, which stayed the foreclosure.
Chapter 13 bankruptcy allows individuals (and hopefully their attorney) to negotiate a payment plan schedule with creditors to pay a reduced sum of debt off over a period of time. However, the creditors (the people to whom you owe money) have the right to object to proposed repayment plans, and the bankruptcy court and trustee must approve the plan.
As part of their bankruptcy plan, Jernigan and Anderson proposed that they would pay off their past-due amounts on the mortgage, reinstate the loan’s original date of maturity (ending date), and resume making monthly payments at the original five (5) percent interest rate.
The Hancocks objected and took the matter before the judge, who agreed with them: the past-due payments and payments going forward should be at the seven (7) percent rate that was triggered when the buyers defaulted. Notably, the fact that the buyers filed for bankruptcy protection did nothing to alter the somewhat harsh terms of the original seller financing agreement.
Federal bankruptcy law states that a repayment plan can “cure” a default, but cannot “modify” any claim secured by the debtor’s principal residence (such as a mortgage). Unhelpfully, the law does not define either of these terms. Anderson and Jernigan tried to argue to the Court in this case that restoring the loan’s term to pre-default status amounted to a cure for a Chapter 13 plan and that a modification would be more severe, entailing something like a proposed interest rate lower than the original five (5) percent.
This argument didn’t fly. In a unanimous opinion the Court said that reinstating the pre-default five (5) percent interest rate would stretch the meaning of a cure beyond what Congress intended. Home mortgagor lenders perform a valuable social service, the Court opined, and need special protections against modifications by their lenders.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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