Mortgages & Bankruptcy Law
A mortgage has special significance in bankruptcy. Previously, a case mortgage foreclosure could be halted by the filing of a bankruptcy case. During a case mortgage, holders will have special priority over unsecured creditors. After the case, a debtor may have personally liability on a mortgage loan discharged but the mortgage lien itself will remain.
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Mortgage
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A mortgage is a secured lien attach to real property. Often, the term mortgage is confused with the mortgage loan. The mortgage just represents the lien and not the loan itself. Individuals often take out mortgages when they buy a home which they could not afford to pay for out of their savings.
Bankruptcy and Foreclosure
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Ordinarily, a mortgage gives the mortgage holder the ability to foreclose upon a property when the mortgage loan defaults. However, when a bankruptcy is filed the automatic stay prevents any type of collection attempt by creditors. This may prevent a foreclosure and give the debtor time to straighten his finances.
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Bankruptcy Exemptions
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A mortgage also related to bankruptcy law by way of exemptions. Bankruptcy exemptions are covered under state law. The homestead exemption is the exemption for the equity in a debtor's home. There are wide ranging values for homestead exemptions. The homestead exemption is unlimited in Florida and Texas but most states limit the amount of the exemption. For example, it is $50,000 in New York. If you have $50,000 in equity, that much money is protected even if there is a mortgage on the property.
Secured Creditors
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Creditors who have a security interest in property of a debtor are known as secured creditors. An example would be a bank with a mortgage or an appliance vender with a purchase money security interest. In bankruptcy, secured creditors have a higher priority than unsecured creditors and will be paid first with the money in the bankruptcy estate.
Chapter 13 and Mortgages
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In a Chapter 13 bankruptcy, a plan is created to pay back creditors a portion of what they owe. Homeowners often prefer this type of plan because they wish to retain their home. It allows them to stop a foreclosure proceeding, to cure back payments, extend the life of payments on secured debt and reschedule some secured debt. However, debtors must still make all payments to keep their residence.
Chapter 7 and Mortgages
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In a Chapter 7 bankruptcy, all of the non-exempt property of a debtor is pooled into the bankruptcy estate. The funds are then distributed pro rata to secured creditors and if there are any funds left over the remaining funds are distributed pro rata to unsecured creditors. Under a Chapter 7 bankruptcy, whether there is a mortgage or not, the debtor will lose the non-exempt portion of the equity in the home and it may be foreclosed upon.
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References
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