When homeowners file for bankruptcy, they are often concerned about what will happen to their home, if they will be able to keep it and what will happen to their mortgage. It is common for us to hear the question, “Will filing for Chapter 7 get rid of my mortgage?” The answer is far more complex than a simple yes or no.
First: Do you want to keep your home?
People must answer this question prior to moving forward. Some people do not want to keep their home, are tired of paying the mortgage and are more than happy to be rid of it. However, for others, the thought of losing their home can be devastating. This is a highly personal decision and it is an important one to consider prior to meeting with an attorney.
There is no wrong answer, but planning is necessary in order to handle the process correctly. People need to base the decision on whether someone wants to remain in their home or not.
If the home stays, the mortgage stays
Homeowners who choose to keep their home during the bankruptcy process must reaffirm the debt. In this case, we will alert the creditor that there is a bankruptcy but that the individual is keeping the home. If the house payments are in arrears, negotiations will take place to determine what to do with the funds one still owes. Typically, they will add the amount to the balance of the loan or pay it at the very end.
Monthly home payments can then continue. If we negotiate a lesser payment here, that is the payment that we need to make. Regardless, the key is to keep making the monthly payments. Otherwise, the creditor can foreclose on the house at a future date.
Why bankruptcy helps
When someone is behind on their mortgage but wants to remain in the home, filing for bankruptcy can make that possible. Lenders are unlikely to try and foreclose due to back payments. If one reaffirms the debt, the creditor will be getting payments on time going forward. This makes them likely to accept an agreement where back payments are added to the end of the loan or a new payment arrangement is reached.
Sometimes, lenders will temporarily lower the mortgage payment with it ratcheting back up at a future date. Essentially – anything is possible, but the new agreement should be financially beneficial, regardless of what the exact terms are.
Consider a Chapter 13
If there is a lot of equity in the home, filing for a Chapter 7 bankruptcy may not be the best option since the court could require it to be sold to pay creditors. In this case, a Chapter 13 would allow for debts to be reorganized and the home to be kept.
Speak with a lawyer
Once a bankruptcy attorney has been hired, lenders will know that it is time to work out an agreement or face the consequences of a debt being discharged in a bankruptcy. This makes it more likely that a solution will be reached in regards to the home and mortgage. To find out how this can work for you, call and schedule a consultation with our office.
NOTE: This is for informational purposes only and does not constitute legal advice.