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Declaring bankruptcy affects your mortgage in a myriad of ways, depending on the type of bankruptcy you choose to file. If your debt level is overwhelming, bankruptcy may be the only reasonable option available to help you manage your financial situation. Before you file, however, it is imperative that you consider the risks and benefits of filing for bankruptcy and how doing so will affect your mortgage.
Bankruptcy Prevents Foreclosure
Problems with debt can leave you unable to make timely mortgage payments to your lender. Should this occur, your lender may initiate foreclosure proceedings against you. This allows the lender to seize your home to make up for the remaining balance on your mortgage. Declaring bankruptcy, however, can stop a foreclosure.
When you declare bankruptcy, the court imposes an automatic stay on all of your creditors. This automatic stay prevents your creditors from taking legal action against you during your bankruptcy. Even if your home is in the final stages of foreclosure, a declaration of bankruptcy forces your mortgage lender to cease all legal action and wait for the court to evaluate your situation and make a decision.
The Type of Bankruptcy You Choose Affects Your Mortgage Liability
When filing a personal bankruptcy, you may opt for either Chapter 13 or Chapter 7. In a Chapter 13 bankruptcy, your liability to your mortgage company remains in place, but you have the option to repay your overdue payments through a repayment plan. A Chapter 7 bankruptcy, however, usually discharges your outstanding debts. Because your mortgage loan is secured by your home, however, your debt to your mortgage lender cannot be satisfied while the home remains in your possession.
Depending on the exemptions available in your state and the amount of equity present in your home, you may be able to keep your house even after declaring bankruptcy under Chapter 7. In some cases, however, the court may decide that your debt can be handled more efficiently by selling the property. When this occurs, the court will repay your mortgage lender and use any remaining proceeds from the sale to attempt to repay as many of your other creditors as possible.
Reaffirming Mortgage Debt in Bankruptcy
If paying your mortgage payments doesn’t place a financial strain on you once your other debts are no longer looming, the court may grant you the option to reaffirm your mortgage through bankruptcy. Reaffirming a mortgage during bankruptcy is usually possible only if your mortgage loan is still current.
Through an affirmation, you reach an agreement with your mortgage lender to continue making payments on your home loan. The court then agrees not to include your mortgage in the bankruptcy proceedings. Not all courts honor reaffirmation agreements. Before declaring bankruptcy, familiarize yourself with your state’s laws regarding foreclosure, bankruptcy and reaffirmation.
Declaring Bankruptcy Can Save You from a Deficiency Balance
If you declare bankruptcy, you often have the option to simply walk away from your mortgage loan. Ownership of the property then reverts to your mortgage lender. If your home has dropped in value and you owe more on the loan than the house is worth, your lender may be unable to recoup the full balance you owe when it sells the home. The outstanding balance remaining after the home’s sale is a deficiency balance.
Mortgage lenders in most states have the option to continue to pursue a borrower for the deficiency balance on a mortgage. If you declare bankruptcy and voluntarily allow your lender to foreclose on your mortgage loan, any remaining deficiency can then be discharged through the bankruptcy.
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