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.
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.
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.
Read More: Can You Refuse to Reaffirm a Second Mortgage During Bankruptcy?
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.
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.
- Fabricius Law Bankruptcy: Modifying Secured Loans in Chapter 13
- Erin B. Shank, Attorney at Law: Should I Reaffirm my Mortgage in my Chapter 7 Bankruptcy Case?
- The Bk Blog: If I Do Not Reaffirm My Mortgage in Chapter 7, Do I Automatically Lose Title to My House?
- Moran Law Group: Secured Debts in Bankruptcy
Elizabeth Stock began writing professionally in 2010. Before pursuing a career as a freelance writer, Stock was an editor and note writer for the "Thomas Jefferson Law Review" while attending Thomas Jefferson School of Law in San Diego. Stock recently graduated magna cum laude from Thomas Jefferson earning a Juris Doctor.