Tuesday, June 14, 2011

How to Handle Your Mortgage in a Bankruptcy

For most of us, a mortgage is the single largest debt we have. While borrowing several hundred thousand dollars to purchase a home is usually a good financial move, it can also become a heavy monthly burden, especially when a loss of income occurs.

If you are considering bankruptcy and you own a home with a mortgage, then you will need to understand what your options are.

Options for Dealing Mortgage Debt

1. Discharge the Debt and Lose the House. The simplest thing to do is to simply get the mortgage debt discharged as part of your bankruptcy. While bankruptcy can get you off the hook in terms of liability to repay the debt, it will not remove the lien on the property. This means that your lender will exercise their legal right to repossess and sell the property.

2. Reaffirm the Debt and Keep Making Your Payments. The next option is to reaffirm the debt and continue making your mortgage payments. When you reaffirm debt, you are effectively keeping that debt "out of the bankruptcy". As long as you can maintain your mortgage payments you can keep the property.

3. Redeem the Property. This is not really an option for most people, as it requires coming up with a lump sum of cash equivalent to the value of the home. When property is redeemed, the creditor is paid the value of the property and the bankruptcy petitioner keeps it.

Options Available Only in Chapter 13
If you've already fallen behind on your mortgage payments, only a chapter 13 bankruptcy allows you to catch up on the past due mortgage debt over time, allowing you to keep your house. You can stop a foreclosure and keep your house permanently, something you can't usually do in a chapter 7.

Which Option is Best For You?
The best way to handle your mortgage in a bankruptcy is contingent on a couple of things:
  1. Do you have the income to justify keeping your mortgage?
  2. Is the house worth more than the mortgage debt against it?
Can You Afford the Mortgage? This is something that you really need to consider carefully. Many people have found that they bought more house than they can really afford. If this is the case, then walking away without any debt liability may not be such a bad idea.

How Does the Value of the Property Compare to the Amount of Debt? If you bought your house a few years ago for $350,000 and now it's worth $250,000 then it may be time to walk away with a clean slate.

If your house is worth more than your loan and you have enough income to cover it, then you can certainly elect to keep the property and continue with your mortgage payments. Perhaps getting all of your credit card debt and other debts discharged is what you really need out of the bankruptcy.

Is Your Equity At Risk?
However, if you do have a lot of equity in your home then the bankruptcy trustee may want to sell it to repay some of your debt. It's all contingent on the amount of the homestead exemption in your state and the amount of equity you have in the home. For more on that, see It's All About the Equity and Meet Your Bankruptcy Trustee.

If it turns out that you have a lot of non-exempt equity that would be subject to liquidation in a chapter 7, then you may be better served by a chapter 13 bankruptcy plan. In a chapter 13, you can protect all of your property and still get rid of a lot of your unsecured debts. See this post on Debts in Chapter 13 for more on how it works.

No comments:

Post a Comment