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Bankruptcy options and how they affect your mortgage

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If you are contemplating filing for bankruptcy, you need to know how your credit report, especially on mortgage will be affected. Once you are clear on the impact, you can decide if this popular debt settlement option is perfect for you or not.


bankruptcy options

Bankruptcy is overwhelming. And if you have taken advantage of all available options to no avail and decided to embrace bankruptcy, it is worth knowing and understanding what alternatives you have and their impact to an existing mortgage or future home loan financing.


Understanding Chapter 7 and Chapter 13


Chapter 7 bankruptcy is the wipe out of many if not all your debts. Commonly known as liquidation bankruptcy; the debtor is forced to sell his property so that he can pay some or all of the debt. In some scenarios, debts are forgiven straight up but with some exceptions.


Chapter 13 bankruptcy, on the other hand, is like debt repayment plan where you follow a plan that is overseen by a court appointed trustee to whom you will be submitting monies for clearance with your creditors. The court gives details of how you will pay your debts. In this case, some debts are cleared in full, while some are paid partially.


Effects of Chapter 7 Bankruptcy on Existing Mortgage


mortgage

Once you file for bankruptcy under Chapter 7 and the court indeed declares you bankrupt, the property in question is considered either exempt or nonexempt. Exempt means you will be allowed to own the house throughout the process while non-exempt means you will have to pay the property’s value in cash or surrender it. This depends on the trustee and their preferred choice of property handling.


To get a clear picture of the total bankruptcy effects on your mortgage, you must know the difference between a lien and a loan. A lien is the “right” the mortgage provider has in the property until you clear the loan. When you file for bankruptcy under Chapter 7, you are exempted from repaying the loan, but you can’t run away from the lien.


Is it possible to get a new mortgage after Chapter 7 bankruptcy?


Of course, it is possible. In the property market, there are mortgage plans and products that are specifically crafted for people with credit issues. Many renowned lenders will not consider you until at least 2 years after the declaration for bankruptcy. However, some creditors will consider you but under unfavourable terms and conditions in your mortgage.


What happens to an existing mortgage under Chapter 13?


The interesting thing about chapter 13 is that you will be able to secure your property. All you have to do is indicate your mortgage repayment loan details. More often than not, automatic stay (stops creditors from conduct any collection efforts) is given out once the bankruptcy is filed.


So how do you stay current on your mortgage payments during the entire period?


In many cases, the debtors pay the money directly to the lender. Whereas in some Chapter 13 bankruptcies, you be required to pay the mortgage payments using Chapter 13 trustee payment plan. The trustee then makes the payment to the lender.


If you are given the liberty to choose, always go for the Chapter 13 strategy. Trustee’s pay will be based on what your pay; the higher the repayment plan, the more fees you will be charged.


Chapter 13 and mortgage arrears


With Chapter 13 bankruptcy, you can always keep your home as long as you repay all your mortgage arrears by the end of your repayment period. This is a major advantage over Chapter 7 to many home owners facing foreclosure.


How long will you wait to get a new mortgage after Chapter 13?


bankruptcy affect your mortgage

Most creditors will not think through you for home loan financing until one year after Chapter 13 filing. Normally, you are given 3 to 5 years to pay the overdue payments. And if you find a lender willing to consider you earlier than that, ensure you understand all that is included in the mortgage plan.


Other significant mortgage alternatives provided through Chapter 13 Bankruptcy


Going bankruptcy allows one to access some loan modifications that you would not access otherwise. When considering halting a foreclosure through Chapter 13, hire a renowned insolvency attorney. He will help you make use of options like:


  • Mortgage cram down
  • Reaffirm your mortgage
  • Strip off your home’s second or third mortgage
  • Discharge a deficiency balance

While it may be the only way out of your excruciating debt situation, sometimes, filing for bankruptcy is more or less the only option available for you. However, think how that will affect your mortgage and most important, whether you will get another mortgage anytime soon.


Craig R. Chlarson - Utah Bankruptcy Attorney

My name is Craig R. Chlarson. Whether you are seeking to eliminate your debt, typically through a chapter 7 filing, or whether you are seeking to reorganize your debt, typically through a chapter 13 filing, or even if you have basic bankruptcy questions, call me today. I can help you.

To schedule an appointment, call (435) 901-3449

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