For a large portion of people in America, a home is the most valuable asset they own. It’s only natural, therefore, that one of the main concerns of potential clients is how the Bankruptcy Court deals with mortgage debts.
Bankruptcy Court Won’t Get Involved in Your Mortgage
The good news is that for the vast majority of Chapter 7 and Chapter 13 cases, the Court will not get involved in your mortgage. You can usually continue to make your normal mortgage payments as though a bankruptcy case never happened. In fact, the Bankruptcy Court does not have the authority to alter your monthly mortgage payments. The amount of your payments is controlled by the original mortgage contract you signed when you bought your house. The Court will only become involved in a few situations.
Occasions Where Courts Get Involved
First, in a Chapter 7 case, if you own a valuable home but the mortgage balance is very low, then the Chapter 7 Trustee may seek to liquidate the property. Basically this means the Court will sell the property, pay off the mortgage, and use the sale profits to pay the remaining bills. This is very rare since we typically would not file a Chapter 7 case for someone in that situation.
Also, if you are behind on your mortgage payments when you file a Chapter 7 case, the mortgage company can refuse to reaffirm the debt. Reaffirming a debt is the process of agreeing to continue to be obligated on that particular debt even after receiving a Chapter 7 Discharge. If you don’t reaffirm your mortgage, then the debt is Discharged with your other bills when the Chapter 7 completes. Typically you can continue to make your mortgage payments and may be able to stay in your home, but if you are behind on payments then the mortgage company can start foreclosure proceedings. The Court would not have any authority over the mortgage company in this situation, so unless you were able to work out a solution directly with the mortgage company then the foreclosure would go through.
A Chapter 13 case, on the other hand, is designed to help you if you’ve fallen behind on a mortgage. The Court still does not have the power to modify your regular mortgage payments, but it can help you with the payments you are behind. Instead of being forced to pay all the back payments as a lump sum to stop the foreclosure, the Bankruptcy Court will allow you to repay that amount over a long period of time (up to 60 months).
Don’t Get Behind on Mortgage Payments
The toughest part of filing a bankruptcy case is that it really requires you to take a good look at your financial condition. As I’ve mentioned several times in this blog, the Bankruptcy Court cannot change your monthly mortgage payments. If you’ve gone over your budget and decided that your mortgage payments have gotten to be more than you can afford, then it may be time to let the property go. I recognize that’s a very difficult decision to make, but the Bankruptcy Court is one of the few places where you can get relief from a burdensome property. If you decide to let a property go, then getting a Discharge in bankruptcy will prevent that mortgage company from trying to collect from you on the mortgage contract.
The main thing I want each of you to take away from this post is that bankruptcy is about providing options. Everyone’s situation is different, and the Court provides many potential solutions. At Bond & Botes, our experienced attorneys have years of experience guiding people through the bankruptcy process. We offer free initial consultations at each of our convenient locations. If you have had a big change in your financial condition and you’re struggling to make ends meet, please give us a call to set up an appointment.
Nick Gajewski is an Associate Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. He holds a Bachelor of Arts from the University of Alabama, and a Juris Doctorate from the University of Alabama School of Law. Nick joined the team of Bond & Botes bankruptcy lawyers back in 2014 and has been helping clients navigate financial issues since. Read his full bio here.