Take my home, please.

I would estimate that slightly over 50 percent of my bankruptcy clients are underwater on the home that they own pre-filing. Most of those clients want to know if they can include the home in the bankruptcy petition and if so, how does the process work?

To begin, a home loan can be included in a Chapter 7 filing. If a client owes significantly more on a home than the market value of that home it might be a wise decision to use bankruptcy to eliminate the problem.

Here's how it works:

Your home is a secured debt. Simply put - if you fail to make payments on the mortgage then the home will be taken from you as it represents security on the loan. Florida is a full-recourse state in regard to home mortgages. This means that after the home is taken as security for the loan the bank may ALSO sue the borrower for additional money owed that was not covered by the value of the home. This amount can be significant.

Bankruptcy fixes this problem. When the home is placed into a Chapter 7 bankruptcy petition and surrendered (or simply not reaffirmed) then the obligation of the debtor to pay the mortgage is eliminated via the bankruptcy.

In addition the lender CANNOT come after the borrower for any deficiency amount. Therefore, even if the home is worth only one hundred thousand dollars and the loan amount itself is two hundred thousand dollars the entire loan amount is discharged.

This is a huge benefit to the debtor and is often favorable to a short-sale where the deficiency amount is still due. If the bank "writes off" the amount and issues a 1099 via the short-sale then the debtor can have a potentially huge tax obligation. Not so with bankruptcy - for which there are no tax obligations to surrendering the home.

The power of a bankruptcy to rid an underwater homeowner of a nightmarish situation is impressive.