If you declare bankruptcy, there are established procedures of due process. You don’t automatically lose your house. Nor is your loan accelerated to automatically become due if you’ve been current up to this point on your payments.
Up next, let’s take a look at how bankruptcy affects your current mortgage.
How Does Chapter 7 Bankruptcy Affect My Existing Mortgage?
When you file Chapter 7, your existing property will be deemed exempt or nonexempt. Exempt means you’ll be able to keep the property throughout the bankruptcy process, as long as you can catch up and stay current on your payments.
Nonexempt means you’ll be required to surrender the property or pay its value in cash as a part of the bankruptcy. In some cases, homeowners are allowed to keep nonexempt properties. It all depends on the bankruptcy trustee and how they choose to handle the property.
To understand how Chapter 7 bankruptcy impacts a home mortgage, you must first understand the difference between a loan and a lien.
When you get a mortgage, your mortgage company gives you a loan. The lender lets you borrow money in order to buy a property. When the mortgage company does this, it places a lien on the property. A lien is a right or interest in the property that the lender has until the debt (or loan) is paid in full.
When you file Chapter 7, you’re no longer legally obligated to repay the loan. “Legally obligated” is the key phrase here because Chapter 7 doesn’t get rid of the lien on the property. Your lender still has a right to the property if the debt isn’t paid.
So basically, you don’t have to pay your mortgage. But if you don’t, you will lose your property because your lender will likely enforce the lien they have. If you are able to keep your home as part of Chapter 7, it’s probably a good idea to do everything in your power to keep paying your mortgage loan.
How Are Exemptions Determined In A Chapter 7 Bankruptcy?
Since your house must be considered exempt from the bankruptcy for you to have the most favorable scenario for keeping it, knowing how exemptions are determined is critical. State or federal homestead exemptions determine how your home is handled in a bankruptcy. While specifics will vary by state, here’s how the exemption works.
There’s usually a certain period of time that you must live in the house before it can be considered for an exemption. For example, if you file under the federal statute, you must own the home for 40 months.
The second key determinant for an exemption is the amount of equity you have in the home, which requires knowing your home value. State and federal statutes let you exempt a certain amount of equity from being used by a trustee to pay off creditors and lenders. The exact amount that you can protect will vary from state to state.
Be sure to check the law in your state. Certain states allow you to double the amount of equity exempted if you file for bankruptcy jointly as a married couple.
It’s especially important to remember that if you have so much equity that you fall above the exemption amount, your bankruptcy trustee may choose to sell your home to pay back creditors. They’ll pay you back for any exempted equity following the sale, but you’ll have to find a new home.
In certain situations, you may have the option of reaffirming the debt to avoid losing the house if you continue making your payments. However, it’s best to talk with your bankruptcy attorney and mortgage servicer about your options and how to handle the process.
There are instances where you may have options in deciding which exemption rules apply, so speaking with your bankruptcy attorney is always wise.
What About Chapter 13? What Happens With My Existing Mortgage?
With a chapter 13 bankruptcy, you won’t lose your property. You’ll include details in your repayment plan on how you plan on paying your mortgage. In most cases, an automatic stay is issued once Chapter 13 is filed. An automatic stay means that creditors must stop collection efforts.
The stay was designed to temporarily halt foreclosure and stop repossession of homes regardless of what stage the foreclosure proceedings are in. For homeowners with too much equity to qualify for a homestead exemption in their jurisdiction, this is an advantage of a Chapter 13 filing.
There are a couple of important caveats to be aware of here: First, you must stay current on any mortgage payments that are due after the filing. If you’re behind on your payments, you can include missed payments in your reorganization plan, but you have to make sure you pay all these debts back by the end of your plan timeline.
For the most part, you don't give up any property in Chapter 13 bankruptcy. This means that if you are current on your mortgage, you keep your home. If you are behind on your mortgage or facing foreclosure, Chapter 13 (unlike Chapter 7) allows you to make up mortgage arrears through your Chapter 13 plan.
If you want to keep your home, you must continue to pay your mortgage while in Chapter 13 bankruptcy. You can stop paying your mortgage in Chapter 13 bankruptcy, but you'll lose your house. One of the benefits of Chapter 13 bankruptcy is the ability to catch up on back mortgage payments and keep your home.
You can buy a house after bankruptcy, but you'll have to clear a few hurdles if you need to get approved for a mortgage. The two main challenges are rebuilding your credit and finances, and getting through any waiting period your lender may require.
Your credit score decreases when you file for bankruptcy because it serves as an admission that you are unable to pay your debts, thus creditors will charge you higher interest rates to compensate for the risk of lending to a client with a lower score.
A Chapter 13 petition for bankruptcy will likely necessitate a $500 to $600 monthly payment, especially for debtors paying at least one automobile through the payment plan. However, since the bankruptcy court will consider a large number of factors, this estimate could vary greatly.
Here's the part that some people find confusing. Even though a Chapter 7 bankruptcy discharge wipes out your obligation to pay back the loan, it doesn't eliminate the mortgage lien.
You're not required to notify your creditors before you file bankruptcy. Once your bankruptcy case is filed, though, the bankruptcy court sends a notice to all of your creditors.
Depending upon where you live, you may be able to remain in your home for six months or more after your Chapter 7 bankruptcy has been finalized. Once your bankruptcy is discharged, you will need to find another place to live.
The lien attached to the second mortgage or other junior secured debt is removed, which allows the debt to be reclassified as nonpriority unsecured debt, like medical and credit card debt. You pay your disposable income toward your unsecured debt through your Chapter 13 plan.
Yes, accessing home equity post-bankruptcy can be a viable option. The methods to do this include cash-out refinancing, home equity loans, and Home Equity Lines of Credit (HELOCs). Each option has its merits and prerequisites, such as sufficient equity, satisfactory credit scores, and debt-to-income ratios.
You can buy a house one to two years after filing for bankruptcy if you rebuild credit and avoid new debt. Filing a Chapter 7 or Chapter 13 bankruptcy will show on your credit report and negatively affect your credit score, but that does not mean you can't own a home while you work to improve your credit.
If you practice good credit habits, you can usually expect to have a 600 credit score after bankruptcy within about one to two years after your case is filed and you receive a discharge.
Debt-to-Income Ratio Improvement: Many of your debts may be discharged after bankruptcy. That means you may have no outstanding debt, which reduces your debt-to-income ratio, a factor credit bureau consider when calculating your credit score.
A bankruptcy will lower the score tremendously, and the better your score was before you file, the more it will drop when the bankruptcy order is entered. How much your score falls, and how quickly it recovers, has a lot to do with how you manage your money and your credit.
Bankruptcy can provide financial relief in the form of a restructured debt repayment plan or a liquidation of certain assets to pay off a portion of your debt. Although bankruptcy may be unavoidable for some, it can severely damage your credit score, so it's crucial to pursue all alternatives before considering it.
Depending on whether you filed Chapter 7 or Chapter 13, it'll take two or four years to qualify for a conventional mortgage, one or two years for FHA or VA loans, and one or three years for USDA loan.
Is my mortgage debt discharged when I exit Chapter 13 Bankruptcy? A Chapter 13 Bankruptcy will not eliminate the lien on your home, unless the home is completely paid-off through the Bankruptcy. However, you may be able to remove a wholly unsecured junior lien.
You'll need to wait 2 – 4 years depending on your loan type. For a Chapter 13 bankruptcy, you may be able to apply immediately or you may need to wait up to 4 years. FHA loans are a great option after bankruptcy because they allow you to buy a home with a lower credit score.
In a Chapter 13 bankruptcy, you can cram down your car loan, investment property mortgages, or other personal property (any property other than real estate) loans such as household goods and furnishings. However, you cannot cram down a mortgage on your principal place of residence.
Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.
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