How Declaring Bankruptcy Affects Your Mortgage

Bankruptcy can affect your mortgage in a variety of ways. The way it is affected all depends on which type of bankruptcy that you choose to file.

If the amount of debt you have acquired is too great, then bankruptcy may be the only logical option available to help you in the future of managing your financial situation. Before you file it is vital that you understand the risks that you put yourself in and how bankruptcy truly can affect your mortgage.

Debt can be a variable that leaves you in the situation where you are unable to make you mortgage payments to your lender. If this happens, it’s a possibility that your lender may start foreclosure proceedings against you. This will allow the lender to seize the home to make up for the remaining unpaid balance of your mortgage. You have an option to declare bankruptcy which can typically stop a foreclosure.

As soon as you do officially declare bankruptcy, the court will put an automatic stay on all of your creditors. This automatic stay is made to prevent your creditors to take legal action against you and/or your finances during a bankruptcy. Even when in those final stages of foreclosure, bankruptcy can still force your lender who holds your mortgage to stop all legal action and will have to wait for the court to evaluate your situation and make a choice.

It’s important to know that the type of bankruptcy that you do choose will affect your mortgage liability. Filing a personal bankruptcy allows you to choose between either a Chapter 13 or Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

With a chapter 13 bankruptcy, your liability to your mortgage company will still be in place, but you now will have the option to repay any overdue payments through a repayment plan.

Chapter 7 Bankruptcy

A chapter 7 bankruptcy usually will discharge your outstanding debts. Because of the fact that your mortgage is a loan that is secured by your home, your debt to your mortgage lender will not be satisfied while the home still remains in your hands.

Depending on the exceptions available in your state and the amount of equity that is in your home, you may be eligible to stay your house even after declaring chapter 7 bankruptcy. However in some case,  the court may decide that your debt can be handled more efficiently if the property is sold. When this happens, the court will repay your mortgage lender and use any remaining earnings from the sale to try to repay as many of your other creditors as possible.

Reaffirming Mortgage Debt in Bankruptcy

*  If paying off your mortgage payments does not put a financial damage on you once your further debts are no longer a threat, the court may grant you an alternative to reaffirm your mortgage through bankruptcy. However, this would only be possible during bankruptcy if your mortgage is still current.
* Through an affirmation, you reach an agreement with your mortgage lender to carry on making payments on your mortgage. The court then concurs not to contain your mortgage in the bankruptcy procedures. Not all courts will respect reaffirmation agreements. Before declaring bankruptcy, familiarize yourself with your state’s laws regarding foreclosure, bankruptcy, and reaffirmation.
* Depending on if you live in a recourse or non recourse state, some mortgage lenders will have the option to continue to go after the borrower for the deficiency balance on the mortgage loan. But when declaring bankruptcy voluntarily and allow your lender to foreclose on the mortgage, any deficiency that remains can be discharged through the bankruptcy. Overall, bankruptcy can help temporarily stop the foreclosure.

Myths about declaring Bankruptcy

* Regardless of the fact that bankruptcy is listed in public records, the chance of anyone finding out besides you and your creditors is very, very slim. There are so many actions that take place in public records daily. So unless you’re a major corporation or small business who has declared bankruptcy, your secret is most likely safe
* It is true that some debts can be erased, but that does not mean all debts will be abolished just from filing chapter 7 bankruptcies.  Some debts that cannot be erased include child support and alimony, student loans, and debts incurred as the result of fraud.
* The common cliché, “I’ll lose everything I have,” is not 100% true. Bankruptcy can be devastating, but that’s a bit of an overstatement considering it is worse with foreclosure. On top of that, bankruptcy laws do vary from state to state and there are some things that are protected such as some assets like your house, a certain valued car, money that is in some sort of retirement plan, and all of your material possessions. According to some bankruptcy trustees, most people will pass through a bankruptcy case and keep everything they have.
* The conception that you’ll be stuck with horrible credit for the rest of your life is another bogus lie about bankruptcies. True, filing for bankruptcy is one of those last resorts that in the long run will ruin your credit score and be on your credit report for several years to come, but it does not eliminate your ability to be able to take out secured loans and credit cards, or small lines of credit to be able to build your credit back up within the next few years. There are several great ways to rebuild your credit.
* Another common misconception is that married spouses have to both file for bankruptcy. It is actually quite common for one spouse to have a significant amount more debt then their spouse. But it’s common for spouses to file together, because in most cases, the creditor will go after the spouse who didn’t file for repayment of the deficient amount. Though it is not legally required.
* It is a lie that you need an attorney to file, but it is not recommended that you do not use one.Going through bankruptcy on your own can be very risky and is not the wisest choice.
* Watch out for people who are trying to scam you into believing that bankruptcy will improve your credit, because it’s eliminating certain debts. This is not what it does and anyone who tries to tell you otherwise is a scam.
* Can you only file for bankruptcy once in a lifetime? You can only file for Chapter 7 bankruptcy once every eight years. For Chapter 13 reorganization, you can file more often than that, but you can’t have more than one case open at the same time. Although multiple bankruptcies is not recommended and they are really bad.

Filing for Bankruptcy Without an Attorney – Information from USCourts

Corporations and partnerships must have an attorney to file a bankruptcy case. Individuals, however, may represent themselves in bankruptcy court. While individuals can file a bankruptcy case without an attorney or “pro se,” it is extremely difficult to do it successfully.

It is very important that a bankruptcy case be filed and handled correctly. The rules are very technical, and a misstep may affect a debtor’s rights. For example, a debtor whose case is dismissed for failure to file a required document, such as a credit counseling certificate, may lose the right to file another case or lose protections in a later case, including the benefit of the automatic stay.Bankruptcy has long-term financial and legal consequences – hiring a competent attorney is strongly recommended.

Debtors must list all property and debts in their bankruptcy schedules. If a debt is not listed, it is possible the debt will not be discharged. (Lists of the documents [including schedules] that debtors must file are set out on Form B200 (pdf), one of the Director’s Procedural Forms.) The judge can also deny the discharge of all debts if a debtor does something dishonest in connection with the bankruptcy case, such as destroying or hiding property, falsifying records, or lying. Individual bankruptcy cases are randomly audited to determine the accuracy, truthfulness, and completeness of the information that the debtor is required to provide. Please be aware that bankruptcy fraud is a crime.

Pro se litigants, whether debtor or creditor, are expected to follow the rules that govern procedures in the federal courts. Pro se litigants should be familiar with the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the local rules of the court in which the case is filed. Local rules, along with other useful information, are usually posted on the court’s web site and are available at the local court’s intake counter.

Credit Counseling

Individual debtors are generally required to obtain credit counseling from an approved provider within 180 days before filing a case, and to file a statement of compliance and a certificate of credit counseling furnished by the provider. Failure to do so may result in dismissal of the case.

Finding an Attorney, including Free Legal Services

Debtors are strongly encouraged to obtain the services of competent legal counsel. Even if you cannot afford to pay an attorney, you may be able to qualify for free legal services. For information about hiring an attorney, or about free (also known as “pro bono”) legal services, contact your state or local bar association. Many law schools have legal clinics that offer free legal services. Court web sites often have contact information for bar associations and pro bono legal service programs, as well as important procedural information.

For information about such legal resources, check the American Bar Association’s Legal Help page, the Legal Services Corporation, or the web site of the bankruptcy court where you intend to file. If you do not know where you are permitted to file a case, check the Official Bankruptcy Forms page to see the box on Form B1 (Voluntary Petition) entitled “Information Regarding the Debtor – Venue” and the part of the Instructions relating to that box.

If you are filing or involved in a bankruptcy case and do not have an attorney, the web site of the bankruptcy court where the case has been or will be filed may be of assistance. The Bankruptcy Resources page may be of help as well.

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