Claiming bankruptcy can be an excellent way to overcome financial troubles and deal with the debts you are simply unable to repay; however, when property is involved many people become concerned that they will lose their house. Speaking to a qualified bankruptcy attorney or financial advisor who understands the tips and tricks of dealing with both bankruptcy and mortgages will allow you to make an informed decision as to whether filing for personal bankruptcy under either Chapter 7 or 13 of the U.S. Bankruptcy Code would be the best solution to your financial concerns.
Chapter 7 Bankruptcy and Mortgages
Chapter 7 is also called a ‘liquidation’ bankruptcy as it involves a court-appointed trustee having access to eligible property and assets and selling them off in order to make repayments to creditors who you are indebted to. Although it is unlikely that the creditors will receive the full amount owed to them, once the bankruptcy is finalized, any remaining eligible debts are discharged, leaving you with a clean financial slate. When dealing with a Chapter 7 bankruptcy and mortgages, it is important to remember that your mortgage is not eligible for discharge and will remain following the finalization of your bankruptcy proceeding.
For those who are concerned about losing their house during a Chapter 7 bankruptcy, it is important to note that you do have options. The most common option is to reaffirm your mortgage. This means that you promise to continue making your mortgage payments for the duration of the bankruptcy process and once it is finalized. If you opt for this approach, it would be wise to meet with a mortgage advisor from your lender to enquire whether it would be possible to reduce the payments to something more affordable, in order to ensure that you will successfully be able to pay them. Since Chapter 7 does not protect your home from foreclosure, it is essential that you continue to make payments.
A meeting with a qualified bankruptcy attorney will give you the opportunity to go through the federal and state bankruptcy exemptions to see which you are entitled to and whether they would help you keep your house. For example, the federal bankruptcy exemptions for homesteads equal $21,625, meaning that if the equity in your house is less than that amount, you house will be safe from seizure. It is important to compare the state and federal bankruptcy exemptions to see which offers the best advantages for your situation, as long as you are eligible for them.
Chapter 13 Bankruptcy and Mortgages
Chapter 13 bankruptcy is also called a ‘wage-earners’ bankruptcy as it involves committing to a repayment plan to take place over a period of 3-5years in an effort to repay at least a portion of the debts owed to creditors. In order to qualify for a Chapter 13 bankruptcy filing, you must have steady income providing sufficient disposable income to be able to make regular monthly payments to the trustee appointed by the court to oversee the repayment to your creditors. It is easier to deal with a Chapter 13 bankruptcy and mortgages as the repayment plan makes it possible for debtors to keep secured debts, such as a home.
If it is possible for you to continue making mortgage payments throughout your Chapter 13 repayment plan, it is important that you are sure that you will be able to do so for the duration of the bankruptcy. This is due to the fact that any modification to the mortgage, renegotiation of the terms of the mortgage, or re-mortgaging of the property may only be done with permission of the court while you are completing the repayment plan.
It is not uncommon for those who have been suffering with financial worries to have taken out a second mortgage on their home. When it comes to bankruptcy and mortgages, having a second one is not necessarily a bad thing as it could be eliminated entirely. This could happen if the value of the property is worth less than the balance owed on the first mortgage; however, it is only possible through a Chapter 13 repayment plan and not a Chapter 7 liquidation.
Past Bankruptcy and Mortgages
If you have recently experienced a personal bankruptcy, you will find qualifying for a mortgage incredibly difficult. This is mainly due to the fact that your credit score will have been decreased significantly as a direct result of declaring bankruptcy, not to mention the fact that you were probably late or remiss in paying your bills prior to filing the actual bankruptcy petition. While it will be difficult to get a mortgage, this is not to say that it is completely impossible. First of all, you should wait as long as possible after the finalization of your bankruptcy to try to raise your credit score prior to making mortgage applications; however, if you are in a hurry, you may be able to negotiate a deal by putting down a larger down-payment and accepting a much higher interest rate. While it may not be the best situation, it will allow you to purchase property and as long as you continue to improve your credit score, you will be able to renegotiate a deal later on.
When dealing with bankruptcy and mortgages it is always best to consult a qualified bankruptcy attorney who can explain the pros and cons of the various options that may be available to you. Your first step should be to negotiate with the mortgage lender to see if there is any way of renegotiating the terms and conditions of the mortgage to make payments more affordable to you. If bankruptcy is still the only answer, consider whether a Chapter 7 or Chapter 13 would better address the overall needs of your financial situation. Once you have determined your eligibility and chosen a chapter to file under, you will need to analyze the bankruptcy exemptions and calculate the equity tied up in your property. If you choose to reaffirm your mortgage, you must make sure to continue making regular payments in-full to ensure that your property is not foreclosed upon by the lending institution. If you follow the advice of a legal professional, you should be able to complete your bankruptcy and keep your mortgage.
To find out if the personal bankruptcy process is right for you, consider filling out our free bankruptcy evaluation.