A balloon payment, as you probably know, is a large payment due at the end of a loan. For example, you might take out a $140,000.00 loan over 10-years with a $50,000.00 lump sum due at the end of the 10-year period on the loan. Mortgages with a balloon payment are not something I would recommend. Sure, it sounds good when you are taking out a mortgage to keep your payments smaller. After all, what could possibly happen in 10 years that would prevent you from being able to refinance the balloon? It isn’t even remotely possible that you would have a job loss or illness that would put you in a difficult financial position, right? Also, it wouldn’t be possible for interest rates to go up in 10 years, right. Finally, you will be making so much more money and will have saved so much that you probably will be able to just pay the balloon, right? Are you sensing a bit of sarcasm?
Alright, so you get that mortgage balloon payments should be carefully considered when a person is taking out a loan. However, by the time a person is considering how/if bankruptcy might help with a balloon payment issue then it is typically far past the time of taking out the mortgage and there is no use looking back. The good new is that Chapter 13 bankruptcy might be able to assist with a balloon payment if you are unable to refinance and don’t have the money to pay the balloon. So, how does it work?
Generally, a Chapter 13 bankruptcy will allow repayment of debt over 36 to 60 months. A Chapter 13 debtor makes a payment each month to the Chapter 13 trustee, who then pays out the funds according to a Chapter 13 Plan that is approved by the bankruptcy Court. The amount of the payment in a Chapter 13 varies by case based on the amount of mortgage arrearage, attorney fees, priority debts, etc., that must be paid in full as well as the amount of disposable monthly income of the Debtor(s).
In dealing with a balloon payment that has come due prior to the filing of the Chapter 13 bankruptcy, then in order for a Chapter 13 to be able to feasibly fix the balloon issue, then a Debtor(s) must have enough income to pay the balloon payment over the next 60 months. So, if income is your problem, then it is less likely that a Chapter 13 bankruptcy will help. For example, if your current income leaves you with less money each month than you need to pay your living expenses, then Chapter 13 won’t help because you don’t have any money left over to pay to the trustee. However, if you have good income, but simply need more time to repay due to a temporary job loss, etc., Chapter 13 can be a very attractive option.
Even if you don’t have any funds left over at the end of the month, there may be other options. Perhaps your lender will modify your mortgage. Perhaps you have a lot of other debt and should file a Chapter 7 bankruptcy to clear off that debt. Perhaps you should put the house on the market and sell it to preserve your equity. And, sometimes it makes sense to walk away from a home, surrendering it in a Chapter 7 bankruptcy.
I hope that this blog helps people facing a balloon mortgage payment who don’t have a plan that there may be lots of options available. Clearly some options will be more attractive to you than others. However, in my opinion it makes sense to meet with a bankruptcy attorney near you in order to determine what makes the most sense for you and your family. If you are a resident of Hamilton County, Indiana, including Fishers or Noblesville and would like to set up an appointment at our Carmel, Indiana office call Halcomb Singler, LLP, at (317) 575-8222 or click here.
**Halcomb Singler, LLP, is a debt relief agency. It helps people file for bankruptcy under the bankruptcy code. No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so. The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.