What Can Be Done With An ARM (Adjustable Rate Mortgage)?

In a bankruptcy, the borrower can simply surrender their interest in the home . . . NO DEFICIENCY!>
ARMs (or Adjustable Rate Mortgages) have desended on Colorado in the last several year like a plague. The most common variety carried a 2 year period after finalization where the borrower would be heavily penalized for refinancing out of them. After the 2 year period was up, then the mortgage rate (interest rate paid on the monies borrowed) would increase. Many have found that their monthly mortgage payments increased by several hundred dollars, making them impossible to pay. Others found out, when they attempted to refinance out of these loans that their property was over valued and loaned against from the beginning and hence not eligible for a refinancing.

How Bankruptcy Can Provide Relief From ARMs

Bankruptcy can provide relief from ARMs, but it comes at a cost and depends on how you find yourself situated. If you have simply missed a few payments, but can afford these increasing monthly mortgage payments, and wish to keep your home, then a Chapter 13 may be a solution. In a Chapter 13, you can repay the missed payments through the Chapter 13 Plan over a period of up to 5 years. If you cannot make these payments, and this is how most people in this crisis in Colorado have found themselves, then you can file a Chapter 7 (if you qualify) or a Chapter 13 and surrender the home back to the lender as full satisfaction for the debt – no deficiency judgment.

How A Deficiency Judgment Is Calculated

A deficiency judgment is calculated as follows:
Monies received from the sale of the home (usually 80% of actual value) less monies owed on the loan, plus attorney’s fees for the foreclosure.

For example, you bought your home for $200,000. Two years later, the mortgage payment began to adjust, increase by several hundred dollars and you were unable to pay. After you missed 3 months of payments the bank began foreclosure proceedings. You were served a summons for the foreclosure and went to the court date where they gave you a sale date for your home (when it is actually auctioned) for about 45 days after the hearing. At the sale, the house was bought for about 80% of its true value. So the $200,000 home was purchased for $160,000. Several weeks or months later, the bank then sent you a letter. It read Deficiency Judgment at the top and had the following calculation below:

  • Loan amount: $200,000
  • Less Monies received from sale $160,000
  • Plus attorney’s fees & Cost of Sale: $10,000
  • Deficiency still owed: $50,000

In this example, the former home owner is personally liable for the remaining $50,000. The lender can then sue on this amount, obtain a judgment, and garnish the borrower’s wages, bank account, or lien any other properties that the borrow is on title.

In a bankruptcy, the borrower can simply surrender their interest in the home, and by doing so, force the lending bank to take back the property as full satisfaction of the debt – NO DEFICIENCY!


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