Whether you have fallen behind on your mortgage payments or are facing a foreclosure judgment and sheriff’s sale, you can save your home by filing bankruptcy. Find out how from the office of a noted Philadelphia bankruptcy lawyer.
Chapter 7 Reaffirmation
When you file a Chapter 7 bankruptcy petition, the automatic stay “stays” or stops all collection efforts and legal proceedings against you for the duration of your case. This means that collection letters and phone calls as well as foreclosure lawsuits and sheriff sales are put on pause.
The automatic stay gives you a break and the breathing space to decide what you can do about your mortgage. If you have the means to cure the default (meaning, pay all of the missed payments plus fees and interest), you have the opportunity to do that while you are in bankruptcy. Once the bankruptcy ends, you continue paying your mortgage as before, for more useful information, visit the link.
Few people have the means to cure a mortgage default in one lump sum. If you’ve only missed a few payments, you may be able to negotiate with the mortgage lender to roll those payments into the balance of the loan and recalculate the monthly payment. In the alternative, you may be able to get the mortgage lender to add those missed payments to the back of the loan.
In either of these cases, you will likely have to sign a reaffirmation agreement, which legally “reaffirms” your commitment to pay and the mortgage lender’s right to foreclose if you do not, sell your property, and sue you for any deficiency on the loan after the sale proceeds have been applied to your account.
Mortgage Modification in Chapter 7 Bankruptcy
Many states have instituted mandatory mortgage modification programs for Chapter 7 debtors who have filed bankruptcy due to a mortgage default. In these programs, negotiations between the debtor and the lender can result in a modified mortgage. Possible modifications include extending the loan term, lowering the monthly payment, forgiving some or all fees and interest accrued due to the default, and even modifying the loan balance.
Do I Have to Reaffirm My Mortgage in Chapter 7?
No. In fact, some bankruptcy attorneys recommend that you do not which is explained on the website.
Why? Because reaffirming a mortgage restores all of your mortgage lender’s rights against you. If you default, they can foreclose, sell your property at a sheriff’s sale, and if there is a deficiency balance on your account, sue you for that amount. If you do not reaffirm, the lender has rights only against the property, not you, meaning you can walk away from the property free and clear of debt if you default again in the future and the lender forecloses.
Other Benefits of Filing Chapter 7 Bankruptcy
When you file Chapter 7, you disclose all of your income, expenses, assets, and debts to the Chapter 7 Trustee and the court. Your unsecured debt, such as credit card debt and medical bills, is “discharged” – meaning, you are no longer responsible for paying it.
Having your unsecured debt discharged may make paying your mortgage payments more affordable. And while the following debts are not dischargeable in Chapter 7, again, getting rid of credit card and medical debt may help you pay:
- Child support
- Spousal support or alimony
- Government fines and fees
- Student loan debt
- Most past-due income taxes
Chapter 13 Repayment Plan
If you have fallen behind on your mortgage, but your financial situation has improved somewhat and you have a steady income, you might consider filing Chapter 13 bankruptcy to keep your home.
Chapter 13 involves a three- or five-year repayment plan, allowing you to catch up with mortgage arrears over time. You must pay your regular monthly mortgage payment to the mortgage lender each month outside the plan, and also pay the Chapter 13 Trustee an amount that will allow you to catch up over the life of your plan.
Your mortgage lender is stayed from foreclosing while you are in Chapter 13 bankruptcy and must accept your payments. When your Chapter 13 plan is complete, your case closes and you move on as if the default never happened.
Strip off a Second Mortgage in Chapter 13
If your home is worth less than the amount you owe on a first mortgage, and you have a second mortgage or home equity loan (HELOC), you can “strip off” that second mortgage or HELOC and have it discharged as unsecured debt.
For example, let’s say your home was once worth $400,000. You have owned it for some time and when it was worth $460K you refinanced to pay off some debt. A couple of years ago you took out a HELOC to pay for a new roof.
Today, the housing market is down. Your home is worth $410K and you owe $415K on the first mortgage and $18K on the HELOC. Because you owe more on the first mortgage than the home is worth, you can strip off that HELOC as unsecured, and it will be discharged along with your other unsecured debt, such as credit cards and medical bills.
Whether you file Chapter 7 or Chapter 13, know that getting your unsecured debt discharged will make paying your other obligations, such as your mortgage, more affordable.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy bankruptcy and foreclosure lawyer in Philadelphia.