If you’re considering filing for bankruptcy, it’s natural to want to know how it will affect your existing mortgage and your ability to buy a home in the future. Some bankruptcies will allow you to keep your current home if you can stay up to date with payments.
Most people file for either Chapter 7 or Chapter 13 bankruptcy. Depending on the type of bankruptcy you go through, the waiting period before you can apply for a new home loan will vary.
If you’re thinking about filing for bankruptcy, it’s important to understand which option is best suited to your situation.
Chapter 7 bankruptcy is also known as total bankruptcy. It wipes out much (or all) of your outstanding debt. With Chapter 7 Bankruptcy, you may be forced to sell or liquidate some of your property to pay back your debts. Chapter 7 is also called “straight” or “liquidation” bankruptcy. This bankruptcy option directly forgives your debts (with some exceptions).
Chapter 13 bankruptcy is more like a repayment plan and less like a total wipeout. With Chapter 13, a borrower files a plan with the bankruptcy court detailing how they plan to repay creditors. Borrowers will make partial or full debt payments based on what they can afford.
Liens play a pivotal role in bankruptcy proceedings and when a lender might have a right to foreclose on a home. When a lender lets you borrow money to buy a property, it places a lien on that property. A lien is a right or interest in the property that the lender has until the debt (or loan) is paid in full.
Even though some debts are forgiven during bankruptcy, existing liens on your property are still subject to foreclosure.
There are established procedures of due process for bankruptcy. You don’t automatically lose your house. Filing for bankruptcy also does not automatically accelerate the loan or make it due immediately, as long as you have been making payments on time up to that point.
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.
When you file Chapter 7, you’re no longer legally obligated to repay your home loan. If you decide to stop making payments, there are still repercussions. This is because Chapter 7 doesn’t get rid of the lien on the property. That means your lender still has a right to the property if the debt isn’t paid.
If you can 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.
Knowing how exemptions are determined is critical since your house must be considered exempt from the bankruptcy for you to have the option of keeping it. State or federal homestead exemptions determine how your home is handled in a bankruptcy. While specifics will vary by state, here are some factors that could affect exemption.
In most cases, you must occupy the house as your primary residence for a specified period before it can qualify for a homestead exemption in a bankruptcy proceeding. For example, if you file bankruptcy 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, or how much of your home you currently own. 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 of equity you can protect will vary, so be sure to check the limits in your state. Certain states allow you to double the amount of equity exempted if you file for bankruptcy jointly as a married couple.
When it comes to equity it’s important to know the set limit for your jurisdiction. Because Chapter 7 liquifies your assets to repay creditors, equity must meet requirements to be exempt. Otherwise, you could risk the profits from a home sale being used to pay creditors.
If you and your attorney determine that you don’t meet the limit, you might want to consider if filing for Chapter 13 is a better fit.
In certain situations, you may have the option of reaffirming the debt to avoid losing the house if you continue making your payments. When you do this, you are choosing to maintain the legal obligation to pay your mortgage. However, there are situations where you may be able to decide which exemption rules to apply. It’s best to talk with your bankruptcy attorney and mortgage servicer about your options and how to handle the process.
With a Chapter 13 bankruptcy, you likely won’t lose your property. When you submit your bankruptcy repayment plan it should include the details of how you plan to repay 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 the stage of foreclosure proceedings. This is an advantage of a Chapter 13 filing for homeowners with too much equity to qualify for a homestead exemption in their jurisdiction.
There’s an important caveat to be aware of here: 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.