Will I lose my house if I file Chapter 11? If you’ve decided to declare bankruptcy after considering all your alternatives, it’s important to be aware of your available options. Understanding how your current mortgage and future ability to secure home loan financing may be impacted is crucial.
Before moving forward, it should be noted that this resource primarily addresses Chapter 7 and 13 filings as these are the two most often chosen by individuals filing bankruptcy. However, self-employed people may also consider filing for Chapter 11 bankruptcy. Fishermen and farmers may choose Chapter 12 instead depending on their specific circumstances and meeting all necessary criteria. Regardless, other options may also exist depending on individual situations if applicable.
What’s the Difference Between Chapter 7 and Chapter 13?
Understanding your options is crucial when considering bankruptcy. Chapter 7 bankruptcy is the most frequently utilized type of bankruptcy, often known as “total bankruptcy”, as it involves either the complete or partial discharge of all your debts. Under certain circumstances, liquidating certain assets might be required in order to repay a portion of the debts owed. Furthermore, Chapter 7 is sometimes known as liquidation bankruptcy since all your debts will be completely forgiven in full.
Chapter 13 bankruptcy functions more like a payment plan than a complete discharge of debts. When an individual files for Chapter 13 bankruptcy, they must present a detailed repayment plan to the bankruptcy court outlining how they intend to repay creditors – some debts may be fully or partially paid back, depending on individual circumstances. In summary, Chapter 7 bankruptcy offers a debt wipeout, while Chapter 13 bankruptcy involves a structured repayment plan.
Filing Bankruptcy With a Mortgage
There are procedures that you must follow if you declare bankruptcy. You do not automatically lose your home. If you have been paying your loan on time, it will not automatically be due.
Next, let’s look at the impact of bankruptcy on your mortgage.
How Does Chapter 7 Bankruptcy Affect My Existing Mortgage?
If you choose Chapter 7 bankruptcy, it’s essential that you fully comprehend how it will impact your property. Your assets may either be exempt or nonexempt – exempt property can include assets you can keep as long as payments remain current and arrears are caught up on; while nonexempt items must be liquidated.
On the other hand, the nonexempt property requires you to surrender it or provide its cash value as part of bankruptcy proceedings. Some homeowners may still retain nonexempt assets; ultimately this decision lies with their bankruptcy trustee.
Understanding Chapter 7 bankruptcy requires understanding the distinction between mortgage and loan agreements. When you apply for a mortgage loan from a mortgage company, they provide money for you to buy the home while simultaneously placing a lien against it until your debt (loan) has been completely paid back.
Filing for Chapter 7 bankruptcy frees you of your legal obligation to repay a loan, yet does not remove its lien on the property – meaning if the debt remains unpaid, lenders have every right to seize it from you.
Though not required to pay your mortgage payments under Chapter 7, making timely payments will help preserve your home if that is your goal. Otherwise, lenders could enforce their lien and take possession of it through repossession proceedings – thus it is recommended that if possible make every effort to fulfill your mortgage obligations so as to maintain ownership through Chapter 7.
How Are Exemptions Determined in a Chapter 7 Bankruptcy?
Understanding how exemptions work is crucial, as it determines whether you can keep your home in bankruptcy. Homestead exemptions, whether governed by state or federal laws, dictate how your house is treated during bankruptcy.
Typically, there is a requirement that you have lived in your home for a specified period before you can claim an exemption. For instance, if you opt for federal law, you must have owned the house for at least 40 months.
Moreover, the amount of equity in your home plays a significant role in determining the exemption. This necessitates knowing the value of your home. Federal and state statutes provide guidelines on exempting certain amounts of equity, which safeguards them from being used to repay creditors. However, the specific amount you can protect varies from state to state.
It’s important to check the laws applicable in your state, as some states may offer the option to double your equity exemption if you and your spouse file for bankruptcy jointly.
Keep in mind that if you have accumulated substantial equity, your bankruptcy trustee may sell your house to satisfy creditors. After the sale, you will receive payment for the exempted value of your home, but you will need to find a new place to live.
Under certain circumstances, you may have the option to reaffirm the debt if you continue making payments. It’s crucial to discuss your options with both your bankruptcy lawyer and mortgage servicer.
In certain cases, you may have a choice regarding which exemption rules to apply. Therefore, it is always advisable to consult with your bankruptcy lawyer for personalized guidance.
What About Chapter 13? What Happens With My Existing Mortgage?
You do not have to give up your home if you file for Chapter 13 bankruptcy. When creating your repayment plan, you will outline how you intend to pay your mortgage. In most cases, an immediate automatic stay is issued upon filing for Chapter 13. This means that creditors must cease all collection efforts to receive the automatic stay.
The purpose of the stay is to halt foreclosure and prevent the repossession of homes, regardless of the stage of foreclosure proceedings. This is particularly beneficial for homeowners who do not have sufficient equity to qualify for a homestead exclusion in their jurisdiction.
However, there are a few important factors to be aware of. Firstly, any mortgage payments due after filing for bankruptcy must still be made. If you need to catch up on your payments, you can include the late payments in your repayment plan. Nonetheless, all of these debts must be fully repaid by the end of your reorganization period.
Can You Get a Mortgage While in Bankruptcy?
The answer is no. All major mortgage investors and lenders require the bankruptcy to be discharged or dismissed before application. Many loan types also require you to wait before applying.
Getting a Mortgage After Bankruptcy
If you meet the requirements, it is possible to obtain a mortgage after bankruptcy. Government agencies and nonconforming loans may not impose a waiting period, providing potential options for obtaining a mortgage.
If your goal is to purchase a new home or refinance an existing property following bankruptcy, it is important to understand the considerations involved. It’s worth noting that a bankruptcy filing will harm your overall credit. However, this doesn’t mean that you won’t be able to secure a mortgage in the future. It may simply require some time for your credit to recover. Utilizing tools such as secured credit cards or credit builder loans can help in rebuilding your credit. You can also explore strategies on how to buy a home with bad credit.
How Long Do I Have to Wait After Chapter 7 to Get a New Mortgage?
Lenders require a waiting period of two years after your Chapter 7 bankruptcy discharge before considering your financing application. It’s important to carefully review the terms and conditions of any mortgage offer if you happen to find a lender willing to accept your application before the two-year mark. Thoroughly examine all costs and details to ensure that you are not falling victim to a scam.
Following a Chapter 7 bankruptcy, your mortgage options will be significantly limited. FHA loans, for instance, typically require a waiting period of two years after the bankruptcy has been discharged or dismissed. In the case of conventional mortgages, you must wait four years before you can apply for one after bankruptcy.
How Long Do I Have to Wait After Chapter 13 to Get a New Mortgage?
Other lenders may consider granting you an FHA or VA Loan if you have a Chapter 13 bankruptcy that has been discharged or dismissed before your application.
For conventional loans, it is important to note whether your bankruptcy has been discharged or dismissed. If you have a Chapter 13 bankruptcy, the discharge date must be at least two years before the date of your credit application and four years after the filing.
In the case of a dismissed bankruptcy, there is a four-year waiting period before you can be eligible for a conventional mortgage.
Waiting Periods for Other Bankruptcies
The legal implications surrounding debt discharge and dismissal outside of Chapter 7 or Chapter 13 bankruptcy are not the main focus of this article. However, it’s important to be aware of the waiting periods for obtaining a new home loan if you have previously filed for Chapter 11 or Chapter 12 bankruptcy.
If you meet the other requirements, you can apply for a Chapter 11 bankruptcy mortgage with the FHA or VA if your bankruptcy has been discharged or dismissed at least two years before applying. For conventional and jumbo loans, the waiting periods are four and seven years, respectively.
In the case of Chapter 12 bankruptcy, the policy for conventional loans differentiates between discharge and dismissal. If the bankruptcy was discharged more than two years before the loan application and more than four years ago, it becomes eligible for a loan. The waiting period for bankruptcy discharges is four years.
Declaring bankruptcy is a significant decision that will have a substantial impact on your current and future financial situation. Before ceasing payments or filing for bankruptcy, it is crucial to consult with your lawyer or financial advisor to explore all available options.
Mortgage Bankruptcy Alternatives
Consider carefully whether filing for bankruptcy is truly necessary. The ramifications of bankruptcy can be significant, with a potential drop of nearly 250 points in your FICO® Score if it currently stands at 780. Bankruptcy remains on your credit history for a period of seven to ten years and is reported by each credit bureau. Therefore, it should be viewed as a last-resort option.
It’s important to recognize that a decrease in your credit score may make it challenging to qualify for competitive mortgage rates in the future. This is because you may not have the same level of equity or down payment as individuals who have not gone through bankruptcy. As a result, it’s worthwhile to explore alternative options.
If You’re Having Trouble With Your Mortgage Payment
Those experiencing difficulty paying their mortgage should first discuss the situation and explore their available options. Mortgage payments represent one of the highest monthly expenses, but assistance may be available if needed.
If your financial circumstances have altered and make regular payments difficult to bear, short sales may be an option to consider. A short sale allows the seller to sell for less than the total debt with lender cooperation if hardship can be demonstrated.
Be mindful that, depending on state laws, your lender may pursue legal action against you in order to recover any difference between sale proceeds and outstanding debts.
Deed in lieu of foreclosure is another possible solution, where you voluntarily transfer ownership of the property back to its lender, who then sells it at auction. Sometimes lenders can waive part or all of the deficiency between its value and outstanding balance if the property has been maintained well enough over time.
Note that your lender isn’t obliged to approve of these alternatives; they could insist on foreclosure instead. But most mortgage servicers and lenders will make every effort possible to help you keep your home. If that proves impossible, they’ll work together with you on finding an acceptable solution.
To pursue these options, it will be necessary to provide evidence of your challenging financial circumstances. It is critical to identify what caused it, such as permanent or temporary loss of income or significant medical bills. You may also be required to submit bank and credit card statements as evidence that you have taken steps to reduce unnecessary spending from your budget.
Negotiating With Other Creditors
While your mortgage is undoubtedly a significant financial obligation, it is essential to remember that it is not the sole bill you have to manage. If you can demonstrate hardship, many other lenders and creditors are willing to collaborate with you and negotiate feasible solutions. It is possible to settle your debt for an amount less than what you owe if a mutually agreeable arrangement can be reached.
It may be tempting to disregard unsecured debt, but doing so can have detrimental effects on your credit score. We strongly advise attempting to work out a resolution with your creditors. Even paying a portion of the debt can provide some relief.
Paying your accounts as agreed, albeit not in full, can still harm your credit score. However, it is far better than allowing the account to go into collections or be charged off. Having some payment activity is preferable to having none, as it contributes to improving your credit score.
Bankruptcy and Mortgage FAQs
There are many other factors to consider when you’re considering bankruptcy and your mortgage. We’ll take a look at some of them.
Does Bankruptcy Discharge Mortgage Debt?
The answer to this question largely depends on the type of bankruptcy filed. We will focus on Chapter 7 and Chapter 13 bankruptcy scenarios as they are the most common. If you have any specific inquiries, it is advisable to consult with your bankruptcy lawyer for personalized guidance.
Chapter 7 bankruptcy, often referred to as a “wipeout bankruptcy,” provides relief from all debt obligations. However, if you wish to retain both your car and home, you will need to continue making payments on your car loan and mortgage. Failure to make these payments may result in foreclosure proceedings initiated by your mortgage lender and repossession of your car.
On the other hand, Chapter 13 bankruptcy is centered around reorganization. It allows you to create a repayment plan to address your debts within a specified timeline while also fulfilling your mortgage obligations after filing for bankruptcy. It is important to note that Chapter 13 bankruptcy differs from Chapter 7, as you remain responsible for repaying your debts under a structured plan.
How Do Bankruptcies Affect a Joint Mortgage?
It can present challenges if one person on a jointly held mortgage declares bankruptcy. In certain situations, the bankruptcy of one person can impact the ability to retain the house, even if both individuals are listed on the mortgage. Therefore, it is crucial to discuss the specifics of your situation with your lawyer to fully understand the potential implications and explore appropriate courses of action.
Do Bankruptcies Affect Second Mortgages?
Bankruptcies can also have an impact on second mortgages and Home Equity Lines of Credit (HELOCs). In a Chapter 7 bankruptcy, you are not personally responsible for paying off a HELOC or second mortgage. However, if you intend to keep your home, you must continue making payments on these loans.
In the case of a Chapter 13 bankruptcy, the situation becomes more complex. You can utilize the bankruptcy court process to demonstrate that you lack sufficient equity to repay a second mortgage, HELOC, or other debt. If the court agrees, the junior lien associated with the second mortgage could potentially be eliminated.
It is important to note that lenders may not consent to this arrangement. To enhance your chances of success, it is advisable to obtain a professional appraisal of your property before filing for bankruptcy. This will provide you with a more accurate understanding of the property’s value and assist in presenting a stronger case in court.
The Bottom Line – Will I Lose My House if I File Chapter 11?
Filing for bankruptcy can have negative implications for your home mortgage and overall financial situation. However, it does not necessarily mean that you will automatically lose your home. In the case of Chapter 7 bankruptcy, there is a possibility of losing your home, as it wipes out all debts, including your mortgage. Chapter 13 bankruptcy, on the other hand, offers a more reorganized approach where you can catch up on missed payments as part of your repayment plan.
Whether you can keep your home in Chapter 7 bankruptcy depends on whether it is exempt or not. In Chapter 13 bankruptcy, as long as you make payments according to your plan, you can retain your house. It is important to stay current on your payments if you wish to keep your home, provided that you have the means to do so.
After bankruptcy has been dismissed or discharged, it is possible to obtain a mortgage. However, certain types of loans may require a waiting period following bankruptcy, while others may not. Regardless, it is crucial to focus on rebuilding your credit before applying for a mortgage again, as bankruptcy has a long-lasting impact on your credit score and report.
Considering the significant impact of bankruptcy on your credit, it is important to explore all available alternatives. Negotiating with creditors, as well as options such as a short sale, loan modification, or deed instead of foreclosure, can be viable options if you are struggling to make your mortgage payments. For legal guidance, contact us at Bruner Wright P.A.
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