A Mortgage in Bankruptcy: The Basics

If you have a mortgage in bankruptcy, you may be wondering if you can keep the house. The process of bankruptcy is not directly related to your mortgage. If you cannot afford to pay for your home, they will foreclose on it. However, if you are still making your mortgage payments and you have other debt problems, you may file for bankruptcy in order to obtain help. Here are a few things to consider about having a mortgage in bankruptcy and what will happen to it.

Discharging the Debt

If you file for Chapter 7 bankruptcy, the majority of your debts will be discharged. The obligation to continue paying your mortgage will also be discharged during this process. This means that you can potentially stop paying the mortgage and walk away from the house if you want.

Continue Making Payments

One of the options that you have during this process is to continue making your mortgage payments. In most cases, as long as you continue to make the payments on your mortgage, they will not foreclose on the property. Even though you do not necessarily have the obligation to pay, the bank still has a lien on your property. This means that if you do not continue paying, they still have the legal right to foreclose on the property.

Reaffirmation Agreement

In some cases, people who are going through bankruptcy are advised to sign a reaffirmation agreement. A reaffirmation agreement is a document that reaffirms a particular debt with an individual that is going through bankruptcy. This document basically says that even though an individual is going through bankruptcy, they want to agree to paying the debt anyway. This is commonly done with individuals that need to keep their car even though they are going through bankruptcy. Even though this process is common with certain pieces of property, you do not necessarily need to do this with your house. As long as you are deal ing with a first mortgage, the act of making your payments will act as the reaffirmation of the debt. In fact, it may be to your advantage to not sign one of these documents because if you default on the mortgage in the future, they may be able to come back to you for additional money that they did not collect during the foreclosure process.

Exemptions

When you go through the bankruptcy process, you will get to choose certain property that is exempt from consideration by creditors. Depending on your state laws, many states will allow you to exempt the equity in your home. When the bankruptcy trustee looks at the value of your home and the amount of exempt equity that you have, they may decide that selling your house is not worth the trouble. By the time you add in the costs of selling the house, they may not be able to get anything out of it to pay back your creditors.

 

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