What Happens if a Bank Discharges a Home Loan During a Bankruptcy?

By Elizabeth Stock

At the end of a bankruptcy case, you will receive a bankruptcy discharge that relieves you of all financial obligations toward the debt. The discharge also applies to home mortgages. Depending on whether you file for Chapter 7 or Chapter 13 bankruptcy, and whether you are current on your monthly payments, you may have several options if you would like to keep your home.

Chapter 7

In a Chapter 7, the bankruptcy discharge eliminates your responsibility to repay the mortgage, which means the mortgage company cannot file a lawsuit against you to obtain the remaining balance on the loan. However, since the mortgage is a secured debt, meaning the home is collateral for the loan, you have several options. For example, you can stop making payments on the property and surrender your home to your lender. In addition, if you are behind on payments, the lender can ask the court to order you to abandon the property, or the lender can initiate foreclosure proceedings during or after the completion of your bankruptcy case. If you are current on your payments, then you may be able to remain living in the property as long as you stay current.

Reaffirm Mortgage

When you reaffirm your mortgage, you enter into a new agreement that supersedes your previous loan. A lender may require you to reaffirm the loan if you wish to keep your home. Reaffirming the mortgage creates an agreement that makes you personally liable for the debt, and excludes the mortgage from the bankruptcy discharge. Therefore, if you later find it impossible to make payments on your mortgage after signing a reaffirmation agreement, the lender may be able to file a lawsuit against you for any remaining balance owed after a foreclosure sale. Signing a reaffirmation agreement is, therefore, an important decision to weigh with serious consequences.

Get a free, confidential bankruptcy evaluation. Learn More

Chapter 13

Many individuals who enter into bankruptcy with the desire to keep their homes file for Chapter 13 bankruptcy. Chapter 13 creates a repayment plan that allows you to make monthly payments toward your debts to your bankruptcy trustee. The amount of your monthly payment in the plan will be based upon your income and expenses. If you are behind on your mortgage payments, the past due amount and your current payments will be included as part of your plan, allowing you to catch up and keep your home while making affordable monthly payments.

Common Myths

If you have a second or third mortgage on your property and you owe more on your first loan than the home is worth, you may be able to lien strip, or eliminate the junior loans by filing for Chapter 13. However, each state differs regarding whether it allows lien stripping if the property is your primary residence. If you do strip a second or third mortgage in a bankruptcy, these loans do not completely disappear, but instead are treated in the same manner as unsecured debts, like credit card debt. This means that you will repay only a portion of the debt owed. In addition, if you are hoping to modify the terms of your loan for your primary residence by filing for Chapter 13 bankruptcy, this outcome is unlikely due to an exception in the Bankruptcy Code.

Get a free, confidential bankruptcy evaluation. Learn More
Can You Refuse to Reaffirm a Second Mortgage During Bankruptcy?


Related articles

Can I Convert to a Chapter 7 Without Losing My House or Car?

When you file for Chapter 13 bankruptcy protection, the court requires you to make payments on a three to five-year repayment plan. But it's possible to convert your case to a Chapter 7 bankruptcy. Sometimes, conversion is necessary because you can’t keep up with the payments required under your Chapter 13 plan, but conversion may be possible regardless of your reason. Depending on your situation, you may keep your house and car under Chapter 7, though it may not be easy.

Three Options to Protect Your Car in a Bankruptcy

If you're facing Chapter 7 bankruptcy, you may lose your car. However, depending on where you live and your personal circumstances, you may be able to keep your car even if you file Chapter 7. In other instances, filing Chapter 13 may be a better option if you want to keep your car.

Bankruptcy & Investment Property Foreclosure

When housing prices fluctuate, your investment property may lose so much value that you end up owing more on your mortgage than your property is worth. If you cannot make the mortgage payments, your lender may begin the process of foreclosing on the property. Filing for bankruptcy before the foreclosure is completed may allow you to reduce your debt, or tax burden if your property is sold.


Related articles

What Happens if I Don't Reaffirm My Mortgage After Bankruptcy?

Filing for Chapter 7 bankruptcy is a means to discharge your debts and get a financial "fresh start." A home mortgage ...

How to Reduce Your Mortgage in a Chapter 13

When people file for Chapter 13 bankruptcy, their debts typically exceed their monthly income and they can no longer ...

Ways to Prevent the Loss of Your Home in Chapter 7 Bankruptcy

U.S. bankruptcy law serves two purposes. The first is to give people an opportunity for a new start by wiping away some ...

What Happens When a Bank Charges Off Your HELOC After a Chapter 7 Discharge?

If you file for a chapter 7 bankruptcy, you are asking a federal court to protect you from collection actions and ...

Browse by category
Ready to Begin? GET STARTED