Filing for bankruptcy can certainly have effect on your mortgage, but exactly how it effects it depends on the status on the loan and the type of bankruptcy you choose to file. Chances are, if you are considering bankruptcy, you have already missed one or more mortgage payments. Your credit will take a big hit whether you let it go into foreclosure or claim bankruptcy. Consider the options carefully as bankruptcy and foreclosure can have a different effect on your mortgage.
The Effect of filing Chapter 7 Bankruptcy on Mortgage
Filing for chapter 7 bankruptcy usually means having to sell whatever you own to pay off your debts. The remainder of what is owed is then forgiven. It gives you a clean slate with no remaining debts. There are exception to this rule, however, including your mortgage. If you are current on your loan payments, you may be able to keep the home, especially if there is no equity in it. If you are behind, on the other hand, you may risk losing it. If there is equity in the home, it is likely to be sold to repay your debts including your mortgage and all other debts as to which you seek bankruptcy protection.
The Effect of Filing Chapter 13 Bankruptcy on Mortgage
Filing for chapter 13 bankruptcy provides a better chance of keeping your home. It doesn’t affect the mortgage the same way. The plan actually allows you to pay back payments through the bankruptcy court, giving you the relief needed to catch up and get a fresh start. Basically, this type of bankruptcy gives people a chance to reorganize their debt and create manageable payments so they don’t have to forfeit their property.
Furthermore, chapter 13 bankruptcy sometimes makes it possible to apply for modification of the mortgage loan. So if the home has lost value since you originally purchased it, you can recalculate your loan based on the current market value. There are only certain properties that qualify for this, however. If you would like to see if you qualify for a modification of your mortgage call us for a free initial consultation. 855-288-5359 today
How Claiming Bankruptcy Affects a Mortgage in Foreclosure
You can still claim bankruptcy once the home has gone into default or foreclosure. It isn’t advantageous to wait that long though. Lenders may be able to charge you for the deficiency left over after a foreclosure sale. Even if you don’t end up owing the difference between what is owed and what the property actually sells for, you can still be responsible for paying taxes on the amount forgiven.
By filing for bankruptcy before the mortgage goes into foreclosure, the mortgage is discharged and the lender can no longer come after you for the money owed. The other benefit is that within 24 hours of filing, all creditors must halt their collection practices. That means you could potentially live in the home during the court proceedings and save money for a nest egg to find a new place. Even after completion of the bankruptcy in which you discharge the mortgage there may be a way to continue residing in that home for some period of time up to and including the date of the final payment on the mortgage loan under the original agreement.
Bankruptcy and its Effect on Reverse Mortgages
The biggest difference when filing a bankruptcy on a reverse mortgage is that borrowers can’t receive funds during the process. The lien is not dismissed either, so it is not a magical solution for heirs to get rid of the debt and obtain the home. In the case of reverse mortgages, refinancing or selling the home to pay off the debt are both better options than bankruptcy. It does immediately stop the foreclosure action though.
When facing a financial hardship and getting behind on house payments, the negative outcomes are almost inevitable. How you choose to handle the debt depends greatly on your situation and if you are willing to walk away from the home or want to do everything you can to keep it. It is important to carefully weigh the options and the effects that both foreclosure and bankruptcy can have on your mortgage.