Chapter 11 question for a legal eagle. Re: mortgage

[Lil Missy]

A friend of mine took out a ridiculous mortgage over a year ago to buy into a business. Since her credit is poor, she ended up going with a loan shark with an obnoxious interest only mortgage at 12% with a balloon payment at the end of 8 years. She wanted less than 50K, but he insisted on a minimum of 80K.

She's been current on the interest only payments of $800 a month, but only by the skin of her teeth. She can't afford that, and didn't even realize that would not include a balloon payment of 80K at the end of 10 years. Of course she was an idiot, but I should think it would be illegal to charge such an obnoxious rate.

I've done some research and it seems a Chapter 13 bankruptcy might help her in this situation, but it's not clear. She lives in Nebraska and the home was worth 200k before values took a crap, so it might be around 175k or less by now. The house is in Bellevue, which is the home of SAC Headquarters.

I think she should at least talk to a lawyer about a chapter 13, but she seems to think it would be worse to have a bankruptcy on her record than a foreclosure. Her credit score is around 520 and she wants to build that up instead, and apply for a better mortgage deal. (Truthfully, I fear her predator partner of 2 months is trying to convince her to sell it to her for half the price, and so the house will be in the partners name.)

Any insights?

PS - The question is, can a chapter 13 in Nebraska help by putting a stop to the interest, renegotiate the terms, or other remedy?

[Capn Sunshine]

1. Speaking as a former banker

I can tell you a bankruptcy is a little better as a financial end game. Both BK and Foreclosure fuck up your credit for YEARS, but credit is more readily available to an individual post bankruptcy. Bank of America had a hard and fast rule , prior to taking over all those banks, that they would not do a mortgage for you if you had a foreclosure. EVER. I don't know if that's still the case.

All told, foreclosure makes your life a little harder. Your friend's situation requires some work on her part; if her credit is intact she might consider refinancing out of that loan. Early payoff will probably cost you as well, but it beats the balloon waiting at the end of the term.

My advice would be to speak with a bankruptcy attorney, one recommended by at least two acquaintances.

Edit: A Notice of Default is viewed by many underwriters as a de facto foreclosure. That's where a good broker can assuage them individually.