Mortgages And Bankruptcy: What Happens?

When you are thinking about filing bankruptcy one of the biggest concerns is often: what will happen to your mortgage? Will filing bankruptcy help prevent foreclosure on your home? Will it be able to reduce your monthly payments? The answers depend mainly on the type of bankruptcy that you file. You can choose either Chapter 7 or Chapter 13, and each works very differently.  

Your Mortgage Under Chapter 7

A Chapter 7 bankruptcy is designed to eliminate unsecured debt. A mortgage, because it is backed by your home is a secured debt. This means that a Chapter 7 will not help much if you are in danger of foreclosure. Filing a Chapter 7 may help by freeing up money that you are using to pay off credit cards or other unsecured debts, however. Additionally, when you file, an automatic stay is put into place that prevents any collections activity (which includes foreclosure, which is your mortgage company trying to collect on your mortgage). While this stay is only for a few months, or until the bankruptcy is settled, it may give you enough time to bring your mortgage current.

If your mortgage is current, filing bankruptcy will not lower the amount of your payment. This is because again, a mortgage is a secured debt. The only way to renegotiate your mortgage is with the lender.

Chapter 13 and Your Mortgage

Chapter 13 bankruptcies are often referred to as a paying bankruptcy. This is because the purpose of the bankruptcy is to allow you to catch up on arrears. If you are in danger of losing your home because you have fallen behind in your mortgage, Chapter 13 is designed to help with that.

The first way that Chapter 13 helps is by issuing the stay, just like in a Chapter 7. Additionally, if you have multiple mortgages, this type of bankruptcy can help by removing them. This lien stripping removes all mortgages that are wholly unsecured. For example, you have a home that is worth $150,000 and have a primary mortgage of $200,000. Any other mortgages can be removed then because they are not secured by anything.

The last way that a Chapter 13 will help is by letting you pay off your arrears gradually. Most repayments are between 3 to 5 years. How long yours lasts depends on how much disposable income you have and how much debt you have to pay back. As long as you continue to make regular payments during the repayment plan, you have nothing to worry about.

Filing for bankruptcy is a strenuous time. With a little bit of information, that stress can be lowered. If you have any questions at any point, consult with a debt defense attorney (such as one from Brackett & Strunk LLC).