Home Mortgages

How home mortgages are or are not affected by bankruptcy depends on what type of bankruptcy is being field by the debor.

Debtors who need to petition for bankruptcy protection have two choices.  They may file Chapter 7 or Chapter 13 bankruptcy.  Chapter 7 is commonly called no asset or straight bankruptcy.  In Chapter 7, the proceeds from the sale of non-exempt assets are distributed to creditors.  Debtor must also pass a means test to qualify.  Chapter 13 petitioners can keep many assets if they reaffirm the debts that secure them.  This includes home mortgages.

If Chapter 13 bankruptcy is opted for, then the debtor needs to compile a repayment plan for creditors.  The debtor will be allowed to keep assets, including home, while submitting affordable payments to the bankruptcy trustee for the remainder of the debts.  A Chapter 7, however, grants the bankruptcy trustee the legal right to seize and sell non-exempt property to pay outstanding debts.

A mortgage loan has two legal components.  The first component is personal liability for the amount borrowed.  The other is the security interest, or lien, the lender takes in the home. A Chapter 7 bankruptcy can eliminate personal liability of the debtor on the secured mortgage loan, but it cannot eliminate the lien.

Immediately upon filing for bankruptcy, the debtor will have the benefit of a legal principle called the automatic stay.  The automatic stay requires all the creditors to obtain the bankruptcy court’s permission before pursuing collection activities. This includes foreclosure by mortgage lender.  The automatic stay expires at the end of bankruptcy proceeding.  It provides temporary but not permanent relief from mortgage lender.

Since Chapter 7 does not eliminate the mortgage lender’s lien on debtor’s house, the lender can still foreclose if the debtor doesn’t make monthly payments on time.  Additionally, most mortgage loan documents provide that if a borrower’s personal liability under the mortgage is discharged, then the lender has the automatic right to foreclose.  The debtor may avoid the foreclosure by signing a mortgage loan reinstatement after the bankruptcy ends.  This effectively renews mortgage so the lender won’t foreclose, but it also renews debtor’s personal liability on the mortgage.


Inside Home Mortgages