Filing for bankruptcy is a significant life decision that is not taken lightly. For many, an advantage of filing for bankruptcy includes eliminating debt. Homeowners may assume that this also includes mortgage debt and they can then live in their home without having to make payments to a lender. However, this is not the case.
Chapter 7 Bankruptcy and Mortgages
When an individual files for Chapter 7 bankruptcy, most of their outstanding debts are eliminated. This debt includes mortgage debt; however, a homeowner will most likely not be able to stay in their home.
When homeowners enter a loan contract, the lender technically creates a lien on the property by putting the home as collateral. That means that if a homeowner does not pay their mortgage, the lender can enforce the lien on the house and foreclose the home. So while a Chapter 7 discharge takes out the obligation of paying back a mortgage to a lender, it does not eliminate the lien on the home.
Secured vs. Unsecured Debts and Liens
When a debt is labeled secured, the creditor can take the borrowed property to pay off the original debt. On the other hand, unsecured debt cannot necessarily be taken away if the debt isn’t paid, such as money owed to a credit card or utility company. Creditors looking to have the unsecured debt repaid are also limited in how they can contact the debtor.
When focusing on liens, there are two types:
- Voluntary — these are debts typically from secured creditors including car lenders and mortgage companies. With this type of debt, an individual agrees to pay back the debt with interest and puts up the purchased property as collateral. If a homeowner fails to pay back this debt, then the lender has the authority to proceed with a foreclosure and use profits from the foreclosure to pay off the remaining debt.
- Involuntary — these are debts that, when not paid, the federal government can step in and take your assets without any consideration needed. While most liens are voluntary and attached to a piece of property, involuntary liens are usually associated with all of a debtor’s assets.
Ultimately, it is imperative that if a homeowner plans to file for bankruptcy and wants to stay in their home, they must continue making monthly payments or file for Chapter 13 bankruptcy.
Chapter 13 Bankruptcy and Mortgages
Homeowners who get behind on their mortgage payments and can not get caught up may find filing for Chapter 13 bankruptcy more beneficial. One of the key differences between Chapter 7 and Chapter 13 bankruptcy is that when filing for Chapter 13 bankruptcy, you work with the court to come up with a plan to repay creditors. While some debts may be liquidated, others may not, including a mortgage.
Not all who file for bankruptcy will benefit from Chapter 13, though. To make this option plausible, homeowners will need to have enough income to continue meeting their current monthly mortgage obligations and additional expenses while also paying off other unpaid debt. If a homeowner can make this option work and is adamant about staying in their home, then filing for Chapter 13 bankruptcy may be their best option.
How Do I Know Which Bankruptcy Option is Best for My Situation?
There is not a one-size-fits-all solution when it comes to getting out of debt. Every individual or family has a unique situation that can not be completely resolved by research alone.
That’s why the team at Licata Bankruptcy Firm wants to be there for you when you’re considering your debt relief options. While you may think bankruptcy may be the only solution available, we will consider a multitude of options to help you get back on track financially. Schedule a free initial consultation with one of our experienced attorneys today — (417) 213-5006