Bankruptcy Laws Regarding Mortgages
If you find yourself unable to maintain regular, timely payments on your debts, bankruptcy may provide a sensible solution to your financial woes. Depending on which type of bankruptcy you file, the amount of equity in your home and your mortgage payment history, you may or may not be able to keep your home following bankruptcy.
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Chapter 7
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Chapter 7 bankruptcy is the most severe form of bankruptcy, requiring that you liquidate your assets to repay as much debt as possible before the court eventually discharges all of your remaining debts. The only way you can keep your home in a Chapter 7 bankruptcy is if the amount of equity in your home does not exceed Chapter 7 homestead property exemption limits. Homestead exemptions vary by state and also depend on whether you are filing for bankruptcy alone or jointly with a spouse. If the equity in your home does not exceed the homestead property exemption limits applicable to your bankruptcy case, you can remain in your home provided you stay current on your mortgage. If your equity exceeds exemption limits, your bankruptcy case trustee may attempt to sell your home to help repay your creditors.
Chapter 13
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Chapter 13 bankruptcy differs from Chapter 7 in that you do not liquidate your assets and you can keep your home. During Chapter 13, the bankruptcy court will impose an automatic stay on your property, stopping foreclosure proceedings. If you maintain your monthly mortgage payments throughout the automatic stay period, the court will include your delinquent mortgage balances in a three- to five-year structured repayment period in which you repay your debts to your lenders in payments that you can afford. This allows you to remain in your home. If you are not facing foreclosure when you file for Chapter 13 bankruptcy, you cannot include any part of your mortgage in your repayment plan, as mortgage debt uses your home as secured collateral.
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Second Mortgages
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If you file Chapter 13 bankruptcy, you may be able to discharge your second mortgage debt from a home equity loan or home equity line of credit if the court considers the debt unsecured. Though you used the equity in your home as collateral to borrow a second mortgage debt, the money to secure that debt may no longer exist if your property has since dropped in value. If the combination of the balance of your first mortgage debt and the appraised value of your home result in a net asset value of zero, the court may include your second mortgage in your three- to five-year debt installment plan and discharge the remaining balance upon completion of your structured repayment.
Considerations
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As of February 2011, a bankruptcy court can only structure a payment plan for the amount you are delinquent on a loan. However, in 2009, President Obama voiced his support to allow bankruptcy courts to restructure entire mortgages in Chapter 13 bankruptcy, essentially allowing the court to impose a loan modification without the permission of the lender. The court has this liberty with other secured loans, such as boat and vehicle loans, and many people support extending these rights in regard to mortgages.
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References
- Nolo: Your Home in Chapter 7 Bankruptcy
- Scura, Mealey, Wigfield and Heyer: [FAQs] That You Always Wanted to Know in Chapter 13 Bankruptcy
- Bankrate; The Skinny on 2 Mortgages in Bankruptcy; Justin Harelik
- Real Clear Politics; Let Bankruptcy Courts Change Mortgages; Froma Harrop; February 24, 2009
- U.S. Courts: Chapter 7
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