What happens to your mortgage when you file bankruptcy

Bankruptcy can help you recover from your debt, but you’ll still have to make your mortgage payments. An attorney at The Law Office of Joel R. Spivack can explain how the bankruptcy laws affect your home mortgage.

If you’re unable to keep up with your mortgage payments, filing for bankruptcy can offer relief from debt collection and foreclosure. So you may wonder, If I file bankruptcy, what happens to my mortgage? 

The Bankruptcy Code treats the home mortgage differently than other consumer debts because it is secured by collateral. The lender has the right to receive the value of your home up to the debt left on the mortgage. Ultimately, what happens to your mortgage in bankruptcy depends on how far behind you are in payments, whether you have multiple mortgages, and the mortgage terms.

Consumers most often choose to file Chapter 7 or Chapter 13 bankruptcy. Let’s walk through each chapter’s treatment of debts and the home mortgage.

What Effect Does Chapter 7 Bankruptcy Have On A Home Mortgage?

The Chapter 7 bankruptcy allows you to discharge your debts through liquidation. The U.S. Trustee will collect your property and sell it. Then they’ll distribute the collected money to your creditors. Unless you can claim an exemption, you must give up your home to have the remaining debt discharged. New Jersey law does not have a homestead exemption. However, you can choose the federal exemptions, which allow you to keep up to $27,900 of the value of your residence. This rule applies to bankruptcies filed on or after April 1, 2022. 

In addition, you aren’t allowed to “lien strip” junior liens in Chapter 7 bankruptcy. Lien stripping is a process whereby you can remove “junior liens” like second or third mortgages. However, you can only do this in Chapter 13 bankruptcy, not Chapter 7. If you keep your home, each unpaid mortgage lender can foreclose if you fall behind on your payments.

Chapter 7 Discharges Mortgage Debt, Not Mortgage Liens

The home mortgage is typically a secured debt, meaning the mortgage lender will get paid before other bankruptcy creditors. In addition, the Chapter 7 discharge does not remove a mortgage lien if the lender has foreclosed on your home. Even if the debt is discharged, the lender still has the right to foreclosure for missed payments. Thus, you must make up any missed payments and keep your payments current to avoid foreclosure.

What Happens to My Mortgage in Chapter 13 Bankruptcy?

Chapter 13 bankruptcy can help homeowners catch up on past-due mortgage payments and avoid foreclosure by reorganizing their debts. Chapter 13 divides overdue payments into manageable installments based on income over a three to five-year period. At the end of the plan, any remaining balance can be discharged. People who file Chapter 13 won’t lose their property as long as they keep making payments on time. Finally, Chapter 13 allows lien stripping to remove unpaid junior liens after the life of the plan.

Mortgage Lenders Can Ask for Relief from the Automatic Stay When You Don’t Pay Your Mortgage

Ordinarily, creditors are subject to the automatic stay or bankruptcy injunction when you file for bankruptcy. Creditors must stop all collection activities, including initiating foreclosure. However, if you fall behind on your monthly payments, your lender can file a motion for a “relief from stay.” If the bankruptcy court grants the petition and lifts the automatic stay, your lender may continue with foreclosure.

When You Want To Keep Your House

The best way to keep your home in bankruptcy is to reaffirm your mortgage debt. Reaffirming your debt means renegotiating an agreement with the creditor. The debtor usually promises to pay back all or some of the money owed. In exchange, the creditor promises not to foreclose on the property.

Reaffirmation agreements are voluntary, and you must file your agreement with the court. The judge will ensure that reaffirming will not impose an undue hardship on you and is in your best interest. It’s important to be sure that you can keep up with the payments on the reaffirmed debt. Remember, failure to make your monthly mortgage payments will still result in foreclosure, regardless of whether you filed bankruptcy or agreed to reaffirm.

The Law Office of Joel R. Spivack

Bankruptcy offers consumers a fresh start, free of overwhelming debt. If you’re struggling to make ends meet, let us help. We know that bankruptcy is a challenging, emotional time, especially if you’re faced with losing your house. Don’t wonder, If I file bankruptcy, what happens to my mortgage? An experienced bankruptcy attorney at The Law Office of Joel R. Spivack will explain your options for managing your home mortgage in bankruptcy.

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