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Mortgage and foreclosure in Bankruptcy

Your mortgage and bankruptcy

Let's imagine this scenario, which is not at all uncommon: you own a home and are experiencing significant financial hardship. You may have gotten this home a long time ago; worked hard to come up with a deposit and worked hard to choose just the right home for yourself and your family. You have put a lot of effort into turning this house into a home - cozy, comfortable and welcoming. Your home is truly your castle. And now that your financial situation has taken a plunge for the worse and you are considering filing bankruptcy, you wonder: what will happen to your castle? Will the court take it away? Will you have to move and uproot your family when you file your bankruptcy case?

The reality is that in most situations, the court does not "take away" the debtor's home and you do not risk losing your home unless you are not able to afford post-filing mortgage payments. In many situations, filing bankruptcy can actually help you save your home. If you are behind on your mortgage payments, filing Chapter 13 bankruptcy case gives you a valuable opportunity to catch up and repay the past-due amount at 0% interest over a period of three to five years. If you are behind on property taxes, those can also be repaid through Chapter 13 plan.

If you have no equity in your home and it's underwater as so many other homes these days, it's not treated as an asset of any current value. In other words, if you file Chapter 7, the bankruptcy trustee does not pursue sale of this property. In Chapter 13, having this property does not increase your plan payment. If you have some equity in your home, there is a good chance that a big part of it may be exempt and would not trigger liquidation or increase in payment to the trustee. The court allows debtors certain exemptions when the case is filed, meaning that assets worth up to a certain threshold do not have to trigger liquidation (in Chapter 7) or payment increase (in Chapter 13). For your primary residence, the exemption is particularly generous and could be as high as $175,000 depending on your situation.

If you have any non-exempt equity in your home, your home is at risk in a Chapter 7. But don't panic just yet! If this is your situation and you want to retain the home, you can do so if you file Chapter 13. In Chapter 13, any non-exempt amount is repaid to creditors over a period of three to five years. As an example, let's say your primary residence is worth 600k. Your mortgage loans total 475k. You request a homestead exemption of 100k. The non-exempt amount is 25k. This means that approximately 25k would have to be repaid to creditors through the Chapter 13 case; if you have a 5-year plan, this would come out to approximately $417 per month. Your lawyer would be able to calculate the exact payment for you, taking into consideration other factors, such as the trustee's administrative costs which will be added to the payment.

If you are in a  Chapter 13, complete all the plan payments and keep current on post-filing mortgage payments, you will not lose your home. What happens if you can't make the mortgage payments after filing? Try to negotiate with your lender; maybe a loan modification would be possible for you. Loan modification, of your first mortgage loan on the primary residence at least, is not done through bankruptcy and you have to work it out with the lender directly. If the loan modification does not go through and you are not able to work out any arrangement with the bank, the bank will eventually go to the bankruptcy court and ask for a permission to commence foreclosure proceedings. At that point, it may still be possible to work out an agreement - typically, this involves giving the bank a part of the past-due post-filing amount immediately and repaying the rest over the next six months. If you are not able to do that, only then will the house be lost.

Bottom line is that the bankruptcy court and the bankruptcy trustee are sympathetic to the needs of homeowners and is it often possible to  retain your home even when you file a bankruptcy case.

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