Many people worry about how filing a bankruptcy case will affect their home. As long as your case is carefully planned out ahead of time, you can typically file for bankruptcy relief without affecting your mortgage or your home.
Mortgages Debts After Chapter 7
Depending on the type of bankruptcy case you file, you may either eliminate your mortgage debt or leave it untouched. In a Chapter 7 case, for example, you must choose whether or not to reaffirm the mortgage debt on any property you have. Reaffirming a debt basically means that you will still be obligated for that debt after your Chapter 7 case is discharged. The discharge will not apply to the mortgage debt, and you can simply keep on paying your mortgage like normal.
Things can be a little more complicated if you choose not to reaffirm the mortgage debt. Declining to reaffirm the debt itself isn’t usually enough to be considered a default on your Mortgage. Declining to reaffirm means that the debt obligated by the Promissory Note will be discharged, but you can usually continue to voluntarily make mortgage payments in order to stay in good standing under the terms of the Mortgage. The Promissory Note is what obligates you to make payments, but the Mortgage is what gives the mortgage company a lien on your property. As long as you continue to voluntarily make payments, most mortgage companies will not foreclose.
Keep in mind, most mortgage companies will require you to be current on your mortgage payments in order to reaffirm the debt. Additionally, if the Chapter 7 trustee decides there is a large amount of unexempt equity in your property, he or she may decide to sell the property to raise money to pay off the mortgage and have extra funds to pay the unsecured creditors.
Mortgage Debt After Chapter 13
In a Chapter 13 case, you can also decide whether to keep your property (in which case you remain obligated on the debt) or surrender the property and discharge the debt through the bankruptcy case. If the property is surrendered, then the mortgage company will sell the real estate and then file a claim for the unsecured deficiency balance in your Chapter 13 plan. This becomes one of the debts that will be repaid through the reorganization plan. If you decide to keep the mortgage, then you remain obligated to pay the mortgage on the contract terms as though you’d never filed bankruptcy. The debt is not discharged and the terms of the mortgage contract aren’t modified or changed in any way.
The biggest thing to take away is that filing a bankruptcy case will generally not interfere with your mortgage debts. Unless you specifically seek to discharge the mortgage in your bankruptcy case, you’ll be able to keep your mortgage just as it was before you filed.
Naturally, when dealing with any legal procedure that can affect your home or mortgage, you should consult an attorney before getting involved with the court. At Bond & Botes, our bankruptcy attorneys have years of experience dealing with mortgages and all aspects of bankruptcy. If you’re considering bankruptcy but you’re worried about how it will affect your assets or debts you want to keep, please call one of our offices to set up an appointment. We have conveniently located offices in Alabama, Mississippi, and Tennessee, and we offer free initial consultations.
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.