Many individuals or couples that qualify for Chapter 7 bankruptcy wonder what will happen to their mortgage(s), and will they be able to keep their home. The answer depends on the specific situation of that debtor and lender(s).
A Chapter 7 bankruptcy discharges unsecured debt such as credit cards, medical bills, and personal loans. To qualify, a debtor generally has income that is not sufficient to pay back a reasonable portion of the debt within five years.
If a mortgage loan is current at the time of filing and the property securing the loan is protected, a debtor can retain the property and continue to make the mortgage payments as scheduled.
If a debtor is behind on a mortgage, they can bring the loan current and then maintain payments, but they need to act quickly if the lender has begun the foreclosure process. A Chapter 7 bankruptcy will delay a foreclosure, but when there is little or no equity and a loan in default, the lender can usually get court permission to proceed by filing a motion. After the Judge grants the motion, the lender can proceed with foreclosure from the point they left off unless the debtor has cured the default.
If a debtor is seeking a modification of a loan, they should contact the lender prior to filing the bankruptcy to see what the policies of the lender are with respect to bankruptcy. Some lenders will not modify a loan after a bankruptcy is filed. Many, however, will continue to work with debtors on a modification if they get authorization from the debtor’s attorney, or once the case is concluded.
It is often more difficult to deal with second mortgages because many debtors can no longer afford their second mortgage. Although the debt can be discharged, the second generally retains a secured interest in the property after the Chapter 7 is over. Thus, if the debtor retains the property and only pays the first, the second may still foreclose in the future if the value of the property rises. Lenders on second mortgages can also modify payments if they feel it is in their interest, but they too should be contacted prior to filing so the debtor knows what to expect.
It is wise to talk to a bankruptcy attorney who can explain your options for dealing with mortgage debt in detail before you file a bankruptcy case.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.