Bankruptcy Laws Regarding Mortgage

By Heather Frances J.D.

Bankruptcy allows debtors to get some relief from a debt load they cannot otherwise overcome, but it doesn't always allow them to keep their assets. Mortgage lenders have rights even while the homeowner is going through bankruptcy. Depending on the type of bankruptcy a debtor files and how much equity he has in his home, he may lose his home during the bankruptcy process.

Chapter 7

In Chapter 7 bankruptcy, also called liquidation bankruptcy, the debtor's non-exempt assets are sold by a court-appointed trustee to pay the debtor's creditors. State and federal laws provide exemptions for some property, including some of a debtor's home equity. If the debtor has more equity in his home than is allowed by the applicable exemption, his home may be sold to pay his mortgage and other debts. If he does not have much equity in his home, he may be able to keep it even while some of his other assets are sold, but he would still be responsible for the mortgage. If he retains the home, he cannot discharge the mortgage.

Chapter 13

In Chapter 13 bankruptcy, a debtor creates a payment plan, structured over three to five years, to repay his debts. If the debtor is behind on his mortgage payments when he files for bankruptcy, this repayment plan typically includes those back payments. This allows the debtor to catch up on his past-due mortgage payments over time. During the bankruptcy period, the mortgage lender cannot foreclose on the debtor's home as long as he complies with his repayment plan. If he misses payments, however, the court could allow the lender to foreclose.

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Payments During Bankruptcy

During bankruptcy proceedings, the debtor must keep paying his ongoing monthly mortgage payments. Although creditors are prevented from continuing debt collection efforts while the debtor is going through bankruptcy, they can ask the court for permission to collect if the debtor falls behind on his payments. This means lenders can ask the court for permission to go ahead with a foreclosure. To discourage such missed payments, a Chapter 13 debtor's ongoing mortgage payments are sometimes included in his repayment plan.

Mortgages After Bankruptcy

Bankruptcy stays on a debtor's credit report for seven to ten years, but that doesn't necessarily mean a debtor cannot get another mortgage for that period of time. In fact, debtors can become eligible for a new mortgage in as little as one year following their bankruptcy discharge. Mortgages guaranteed by federal loan programs are allowed as early as one year after a Chapter 13 case is concluded, or two years after a Chapter 7. Conventional mortgages may require two to four years before a loan can be granted.

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What Happens to a Home When One Files Bankruptcy?
 

References

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Can You Refuse to Reaffirm a Second Mortgage During Bankruptcy?

Although you've filed for bankruptcy, it is still possible to keep your home despite having a second mortgage on the property. You can enter into a reaffirmation agreement with the lender. By doing so, you agree to remain liable for debts secured by the property. However, you have to stay current and continue making payments. If you don't, you won't be able to discharge this obligation in the future, and the lender can come after you for the balance of the debt. If you have the chance to reaffirm a second mortgage and refuse, you may lose your home.

Legal Rights After Chapter 13 Dismissal

A chapter 13 bankruptcy can allow someone under extreme financial pressure the breathing room needed to reorganize his debts and get out of his financial hole. In many cases, a debtor can stay in his home and keep his car and personal property under a Chapter 13 bankruptcy. When a Chapter 13 case is dismissed before discharge, however, it can put the debtor at risk of losing everything.

What Happens if I Can't Make My House Payments in Chapter 13 Bankruptcy?

Chapter 13 bankruptcy can give you a financial clean slate by erasing certain debts and giving you a chance to catch up on your payments. However, your mortgage is generally not one of the debts erased by bankruptcy. If you cannot stay current with all your house payments during your Chapter 13 bankruptcy, your lender can foreclose on your home.

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