Attorney
For many homeowners struggling with debt, the thought of filing for bankruptcy can be overwhelming. One of the biggest concerns when filing for bankruptcy is what will happen to their property, including their mortgage. Will they lose their home? Can they keep making payments? Understanding how bankruptcy affects your mortgage payments, foreclosure risk, and general finances can help you make informed decisions about your financial future.
How Your Mortgage is Treated in Bankruptcy
Your mortgage is a secured debt, which means that your home serves as collateral for the loan. Whether you can keep your home in bankruptcy depends on several factors, including the type of bankruptcy you file and whether you’re up-to-date (“current”) on your payments.
Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, your unsecured debts, like credit cards and medical bills, are discharged. However, your mortgage is a secured debt, so it doesn’t automatically go away. Here’s what happens:
- If you’re current on payments and your home equity is protected under Alabama’s exemptions, you may be able to keep your house.
- If you’re behind on payments, your lender can still foreclose once the bankruptcy case is closed unless you work out a plan to catch up on payments.
You may have the option to reaffirm your mortgage, meaning that you would agree to keep making payments and remain responsible for the loan. If you owe more than your home is worth and can’t afford payments, surrendering your home in bankruptcy allows you to walk away without owing a deficiency balance.
Chapter 13 Bankruptcy
If you’re behind on mortgage payments and want to avoid foreclosure, Chapter 13 bankruptcy may be the better option. In this type of bankruptcy, you can:
- Catch up on missed payments through a structured repayment plan over three to five years.
- Stop foreclosure proceedings immediately due to the automatic stay.
- Possibly eliminate a second mortgage if your home’s value is less than what you owe on the first mortgage (a process known as lien stripping).
As long as you stick to the repayment plan and keep up with future mortgage payments, you can stay in your home.
What If You Want to Walk Away?
If your home is too expensive to keep, bankruptcy gives you a legal way to surrender it and discharge any remaining mortgage debt. This can be a smart financial decision if your home is worth less than what you owe or if your mortgage payments are unmanageable for you.
The Automatic Stay
Filing for bankruptcy triggers an automatic stay, which halts foreclosure proceedings while your case is active. This gives you time to assess your options and determine whether you want to keep your home or explore other solutions.
Talk to a Bankruptcy Attorney About Your Options
Your mortgage is one of the biggest financial obligations you have. Making the decision to file for bankruptcy can be difficult, but making the right decision in bankruptcy can protect your home, reduce financial stress, and help you rebuild your future.
At Pleasant Legal Solutions, we can guide you through the bankruptcy process and help you understand the best course of action based on your unique situation. Contact us today for a consultation and take the first step toward protecting your interests.