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.
A Chapter 7 bankruptcy wipes out your financial debt, including your mortgage, but you could lose your house. A Chapter 13 bankruptcy is more of a reorganization, and you can even catch up on payments as long as these are included in your plan.
Mortgage loans usually “ride through” the bankruptcy, meaning that they are not formally reaffirmed but the mortgage company continues to accept payments and does not foreclose as long as you are making the payments.
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.
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.
Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.
It's entirely possible to get a mortgage after a bankruptcy. However, the amount of time you need to wait after your bankruptcy is dismissed or discharged depends on the type of bankruptcy and your loan type. Let's say you filed for Chapter 7 bankruptcy. You'll need to wait 2 – 4 years depending on your loan type.
Money you had paid in the payment plan suddenly is applied to interest on debts that had been held in abeyance, which means you will owe more than when you started.
Creditors in bankruptcy cases have debts paid either by waiting for a distribution from the estate (unsecured creditors), by reclaiming property from the bankruptcy estate (secured creditors), or by obtaining a judgment that the debt is not dischargeable.
Unlike other debts, your mortgage payments will not be discharged after you complete your payment plan. In other words, you'll have to keep paying your mortgage in order to keep your home after you've completed your chapter 13 obligations.
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.
While Chapter 11 filings can be filed by nearly anyone, Chapter 13 filings are reserved for those with a steady stream of income and who meet debt limit thresholds. These filings allow individuals to pay down their debts over time using a proposed payment plan.
Generally, Chapter 7 is more appropriate for simple cases while Chapter 13 for more complicated bankruptcies. Or somewhat more accurately, Chapter 13 can give you more power over and flexibility with certain kinds of creditors, and if you have non-exempt assets.
Obtaining Court Permission to Dismiss in Chapter 7
That's not to say that you'll never receive permission to dismiss your case—it can happen. However, in most cases, the court will deny your request for dismissal unless you have a compelling reason and can show that you can pay your creditors outside of bankruptcy.
Waiting periods after Chapter 7 is discharged vary from two to four years. After Chapter 13 is discharged, some federal loans are available immediately, though a conventional loan requires a two-year waiting period.
Your tax refund is like any other asset in your bankruptcy filing so you may be able to claim an exemption in your Chapter 7 to keep all or a portion of your tax refund. You could then use it however you want or need.
Lenders might forgive some portion of mortgage debt in a sale known as a “short sale” (as in the example, when the sales price is less than the amount owed), in foreclosure, or when there is no sale, but the lender agrees to reduce the outstanding balance on a refinanced mortgage.
The CAA extends the exclusion of cancelled qualified mortgage debt from income for tax years 2021 through 2025. However, the maximum amount of excluded forgiven debt is limited to $750,000.
Caulkett case, the Supreme Court resolved the differing jurisdictional approaches by clarifying that bankruptcy courts cannot strip off a secured property lien in Chapter 7 bankruptcy. The Court held as follows: A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under 11 U.S.C.
In a Chapter 7 bankruptcy, the court would consider what you had in equity, after the exemption, to pay off your debts. If your equity after the exemption is little or nothing, you would likely be allowed to keep your house, since selling it wouldn't generate much money.
Introduction: My name is Chrissy Homenick, I am a tender, funny, determined, tender, glorious, fancy, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.
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