How Does Bankruptcy Affect Your Mortgage?

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.

What’s The Difference Between Chapter 7 And Chapter 13?

If you’re thinking about filing for bankruptcy, it’s important to understand which option is best suited to your situation.

Chapter 7 Bankruptcy

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

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 and Bankruptcy

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.

Filing Bankruptcy With A Mortgage

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.

How Does Chapter 7 Bankruptcy Affect My Existing Mortgage?

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