Can You Lose Your Home With Bankruptcy?
Chapter 7 bankruptcy wipes out most unsecured debts like credit cards and payday loans but filing for Chapter 7 bankruptcy if you own a home may not be the best way forward. We’ll explain in this article how filing for Chapter 7 and other alternatives strategies affect your chances of keeping your home.
Bankruptcy and the Typical Homeowner
You can keep your home after filing Chapter 7 bankruptcy depending on the equity in you have. If your home’s equity is more than the homestead exemption available to you by more than 10 percent, it may be taken and sold, with the proceeds used to pay your creditors.
If you’re able to keep your home, keep making the mortgage payments. Your lender is allowed to foreclose on you after you file Chapter 7 bankruptcy. Only Chapter 13 comes with an automatic stay, which prevents lenders from starting or continuing the foreclosure process.
Your lender may also refuse to accept your mortgage payments if you’re in Chapter 7 bankruptcy. If this happens, make a separate bank account and put your monthly mortgage payments there. Once the lender begins accepting payments, you have the money to pay.
Unfortunately, Chapter 7 doesn’t eliminate non-consensual liens like mechanics’ liens or tax liens. It doesn’t wipe out liens you consented to like a second mortgage. You’re still responsible for those debts.
Mortgage Back Payments and Keeping Your Home
If you’re behind in mortgage payments, your first strategy should be negotiating with your lender. If that doesn’t work try the non-bankruptcy alternatives discussed within this section. Paying your mortgage back-payments before or during Chapter 7 may cause the trustee to question if you are really in need of consumer bankruptcy at all.
Contact your lender immediately if you’ve missed mortgage payments. Most lenders are willing to help you. How much they help you depends on:
• Reason for missed payments
• Credit history
• Current financial situation
Your lender may agree to a loan modification. A loan modification allows you to put missed payments on the back end of your mortgage. It may also lower or suspend your mortgage payments for a short time.
Before working with your lender:
• Assess your current finances and ability to pay current and back-mortgage payments
• Make a budget for your future
• Know how you’re going to deal with recurring debts like utilities, groceries and car payments
• Write a hardship letter explaining how and why you fell behind in your mortgage payments
If your lender won’t refinance your current loan, contact an alternative lender but be aware of non-profit organizations or companies will to help you obtain a mortgage modification. They may be scam artists.
Instead, contact a HUD-approved counselor. They are free and may have some strategies to help save your home.
You may also want to contact your state’s foreclosure prevention agencies. States have their own foreclosure prevention agencies whose job it is to help homeowners save their homes.
The Foreclosure Process
If your financial situation looks dire and permanent, your lender may choose to foreclose. Foreclosing on a home requires a lender to accelerate on your mortgage. Instead of owing monthly payments, you owe the entire balance.
The foreclosure process can take from a few weeks to years to conclude depending on your loan type and where you live. You have options during the foreclosure process to save you home such as:
• Sell your house in a short sale. This means you sell your home for less than the value and your lender agrees to take the money.
• Obtain a reverse mortgage if you’re at least 62 years old and have enough equity in your home.
• File for Chapter 13 bankruptcy. It allows you to make back payments to the bankruptcy while making current mortgage payments to your lender. As mentioned before, the automatic stay halts any foreclosure action.
• Respond to the foreclosure action with a foreclosure defense
A Foreclosure Defense
A foreclosure defense is the reason why the lender shouldn’t be allowed to legally proceed with the foreclosure. The defense must be included in your response to the foreclosure complaint, or lawsuit. The specific foreclosure defends on your circumstances, but some common defenses include:
• Home improvement fraud
• Failure to follow foreclosure procedures
• Interest rate violated federal and state law
• Federal Truth in Lending law violations
Filing Chapter 7 Bankruptcy and Saving Your Home
If you decide to file for Chapter 7 bankruptcy and have significant nonexempt equity, you may be able to keep it by:
- Giving the nonexempt equity amount in cash. Giving the money to the trustee may allow you to keep your home.
• Convert your Chapter 7 into a Chapter 13 bankruptcy. This can be done at any time during the bankruptcy process.
• Try to sell some of the equity in your home. Owning your home jointly with someone else may prevent you from losing your home.
When trying to wipe out your debts, filing Chapter 7 may not be your best option. If you have a home with enough nonexempt equity, you may lose it to your creditors. Prior to filing for any bankruptcy chapter, contact a bankruptcy lawyer to explore your options.
Next we’ll talk about whether or not you should hire a good bankruptcy attorney.
Please contact us to find out the best route to secure your home from bankruptcy…