Your Home and Mortgage in Bankruptcy

Your Home and Mortgage in Bankruptcy

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Since a mortgage is a secured debt, filing for bankruptcy will not allow you to keep your home without paying for it. The best a bankruptcy can do is buy you time to make arrangements to catch up on your payments, or allow you to arrange some kind of adjustment in the terms of your loan so that you can keep your home.

What Happens when I file for Bankruptcy?

When you file for bankruptcy, the law imposes what is called an automatic stay. This prevents any creditor from taking any legal action against you unless they first get the permission of the bankruptcy court. Therefore, if your lender has already begun a foreclosure action, filing bankruptcy will temporarily stop the foreclosure; probably for a few weeks at most. If your lender has not yet filed for foreclosure, it may not do so until the bankruptcy court lifts the automatic stay.

If you file under Chapter 7 of the Bankruptcy Code, you will either need to bring your payments current or work out some arrangement with your lender by the time the automatic stay is lifted. If you file for bankruptcy under Chapter 13 of the Bankruptcy Code, you may be able to get the bankruptcy court to require the lender to accept new terms for repayment (such as extending the time of the loan and lowering the payments).

Liens on Your Home

Bankruptcy won’t eliminate most liens on your home. If you’ve pledged your home as security for loans other than your mortgage—for example, you took out a home equity loan or second mortgage—or a creditor such as the IRS has recorded a lien, those creditors also have claims against your home. Most lienholders have a right to foreclose.

If there is a judgment lien on your home—that is, if a creditor sued you, obtained a court judgment and recorded a lien at the land records office—you may be able to get rid of the lien entirely without paying a cent to the lienholder. You can get rid of the lien by filing a motion to avoid a judicial lien. You may also be able to get rid of some liens by filing a separate lawsuit in bankruptcy court.

Keeping Your House

Even if you keep up with your mortgage payments, you may still lose your house unless a homestead exemption protects your equity—the difference between what your house is worth and what you owe the mortgage lender and all lienholders. If you were to sell your home today, without filing for bankruptcy, the money raised by the sale would go first to the mortgage lender to pay off the mortgage then to lienholders to pay off the liens and finally to pay off the costs of sale and any taxes due. If anything was left over, you’d get it. If you file for bankruptcy and the trustee has your house sold, the creditors will get paid in pretty much the same order, with one big difference. In a bankruptcy sale, whatever is left after the mortgages, liens, costs of sale and taxes have been paid goes not to you, but to your unsecured creditors—unless a homestead exemption entitles you to some or all of it. As a practical matter, if there will be nothing left over for your unsecured creditors, the trustee won’t bother to sell your house. Thus, the amount of your homestead exemption often determines whether or not you’ll lose your home in bankruptcy. If the bankruptcy trustee calculates that there would be leftover proceeds from a sale of your home to give to your unsecured creditors, the trustee will, almost always, take your home and sell it to get those proceeds.

Be Proactive

The best thing to do is to talk to your lender as soon as you find you are having trouble making payments. The longer you wait, the less likely you are to be able to work something out. When you talk to your lender, explain your financial situation and have a plan to present (such as extending the term of the loan and lowering your monthly payments). Just be sure you can follow through with the plan you propose. Many lenders would rather work with you than foreclose. For a lender, foreclosure is time-consuming and expensive; and they really would rather not have to hassle with taking the home back and trying to resell it for enough to recoup their costs.

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