If you are struggling with debt and financial difficulties, you may be considering filing for bankruptcy. Bankruptcy is a big decision and not one you should take lightly. It can be possible to file bankruptcy and keep your home, but the circumstances must be right. You need to make sure that you meet the requirements of the type of bankruptcy you file. For example, in Chapter 7, filers need to be current on mortgage payments and use a bankruptcy exemption to protect home equity. In Chapter 13, filers are able to catch up on missed payments and keep the home.
Chapter 7 Bankruptcy and Keeping Your Home
Filing Chapter 7 bankruptcy is usually preferred since it’s simpler and will allow you to get on the road to financial stability faster. You are able to keep you home if you meet certain criteria. You need to be current on your payments, you must use a bankruptcy exemption to protect the home equity, and you will need to continue making all the mortgage payments in the future.
There are some limits in Chapter 7 bankruptcy that may cause you to not keep your home. It doesn’t help you catch up on any past due payments and it may be harder to keep the home if you have a lot of equity in it. If there is a lot of equity, then the bankruptcy trustee will sell it and use the non-exempt equity to pay off your other debts. Chapter 13 bankruptcy may be a better choice if you could have these issues and Chapter 13 could allow you to get rid of second or even third mortgages.
Finding out if your home is exempt involves just simple math. If you owe more than the market value, it is exempt. You will file the items you think are exempt in schedule C. This not only means your home, but you can also get an allowance for your car and other items, such as furnishings.
Chapter 13 Bankruptcy
If you want to keep your home, but you are behind on mortgage payments, then Chapter 13 bankruptcy can be the right choice for you. When you file Chapter 13 bankruptcy, you can propose a repayment plan and it allows you to pay your creditors over a three-to-five-year period. You are able to treat your mortgage as a separate debt and add it to the repayment plan. Using this plan to catch up on your payments will only work if you are able to have enough income to make both the regular payment and the ones for the new payment plan while you are in bankruptcy. Once you are making payments according to plan then the mortgage holder isn’t able to foreclose as long as you are keeping to the terms of your mortgage, such as making sure you have current home insurance in place.
If you have a second lien on the home, you could also be able to get rid of this through lien stripping. This process is only available in Chapter 13 and only when the property is worth less than the primary loan balance. In order to do this, you need to file a motion in court and present evidence on the mortgage loan balances and the value of the property. If the court voids, then the debt you owe will be treated in the case as if it was secured. The remaining balance then gets dismissed with other qualifying unsecured debt at the end of your case.
What Happens to Your Mortgage after You File for Bankruptcy?
Mortgage is secured debt, which means if you don’t pay then you lose the home. Bankruptcy does complicate this. Under Chapter 7 bankruptcy, if you aren’t able to pay your mortgage then the bank forecloses. The home isn’t yours and you then have to move out. However, you don’t have to make any more payments. With Chapter 13, you need to continue to make your monthly mortgage payments in addition to the past due payments to keep the mortgage alive. However, it’s not always easy. If the case is dismissed instead of being discharged, it’s almost as if you never filed. The majority of dismissed cases happen because homeowners aren’t able to make the payments. The debt is then still owed, and this puts you where you were before you filed. Whether you can or can’t stick with your repayment plan, you are still going to be responsible for paying your mortgage payments or you lose the home.