Will a Chapter 13 Affect My Mortgage?

Chapter 13 bankruptcy lets you keep your home.

One of the biggest worries many homeowners have regarding bankruptcy is losing their home. While Chapter 7 bankruptcy discharges all debt, it also requires the liquidation of assets to pay off creditors. This means that, depending on your state's bankruptcy laws, you could lose your home. Chapter 13 does not discharge all of your debts and provides you with the opportunity to prevent foreclosure and keep your home.

Background

Chapter 13 bankruptcy sets up a court-sponsored repayment program of all discharged debts over three to five years. The amount of time depends on how much your debts are and how much you make, but it cannot go beyond five years. This once-monthly payment is interest-free and is based on all the payoff amounts negotiated with your creditors by the court.

Effects

If you have a mortgage, even if it is in foreclosure at the time of filing, all further collection action stops on your mortgage as it does for all of your other debts. Any back amounts you owe, including fees, on your mortgage, are included in your repayment plan. You still owe your regular monthly mortgage payment, which is part of the calculations the court makes to determine your monthly repayment amount.

Considerations

The court can ask to renegotiate the terms of your mortgage, but your lender is not legally obligated to do so. Unlike other debts that are included in the repayment, the court does not have the right to dictate a new payment amount or loan terms for your mortgage. After you restart regular payments on your mortgage, you are still in danger of foreclosure if you cannot afford your mortgage or do not make the payments. The Chapter 13 just helps you with overdue payments and fees, buying you some time.

Refinance

If your payments are too high, you could try renegotiating your loan terms with your lender. You could also try refinancing your loan or selling your home. Any refinance loan you would be able to get would likely have a high interest rate or attached fees such as a pre-payment penalty. Refinance while in a Chapter 13, however, can be very difficult, if not impossible and would require the written approval of your bankruptcy trustee. Unless this new loan would show a clear-cut financial benefit, your trustee will probably not sign off on the refinance.

New Mortgages

If you are able to sell your home, getting a new mortgage to purchase a home is a challenge. Conventional loan guidelines, which are based on Freddie Mac guidelines, require a 24-month waiting period after Chapter 13 discharge. Discharge occurs after the last scheduled payment is made. You must also have established a positive credit history during the bankruptcy and after, including making your court-ordered payments on time.

Federal Housing Administration (FHA) loan guidelines are more lenient. They allow you to get an FHA loan one year after making your first court-ordered payment. If you rebuild your credit during that year, make timely payments to the court and get your trustee's written permission for the new mortgage, you are eligible for an FHA loan. If you foreclose after bankruptcy, the waiting period for both conventional and FHA loans is significantly longer.

References

• Bankruptcy Law Firms: How Will Chapter 13 Bankruptcy Affect my Mortgage?
• Administrative Office of the U.S. Courts: Chapter 13-Individual Debt Adjustment
• Bankrate: Refinancing a Mortgage in Chapter 13
• Freddie Mac: Bulletin Number: 2010-23
• Federal Housing Administration: HUD 4155.1, Mortgage Credit Analysis, Section 4.C.2.h
• Administrative Office of the U.S. Courts: Discharge in Bankruptcy