Attorney at Debt Advisors Law Offices
Practice Areas: Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, Stop Foreclosure
Sixty-three percent of households in Wisconsin have a mortgage – that’s over a million homes. Bankruptcy can be a challenging ordeal, but understanding its nuances can shed light on what one might expect. A mortgage, typically the largest debt most people will ever carry, is a loan used to purchase real estate. When bankruptcy enters the picture, many people worry about losing their homes. The impact of bankruptcy on a mortgage depends on various factors, including the type of bankruptcy filed – Chapter 7 or Chapter 13. Both types of bankruptcy have different outcomes and handle mortgage debts differently. By understanding how bankruptcy can influence one’s mortgage situation, a sense of control and preparedness can be regained in this complex legal process.
In a Chapter 7 bankruptcy, an individual may worry about losing their home, but protections called exemptions can often ease these concerns. The Homestead Exemption is one such safeguard that can help shield a portion of a person’s home equity. Home equity is the amount by which the current market value of a home exceeds the outstanding mortgage balance. The Homestead Exemption allows a debtor to exempt, or protect, some or all of this equity, which means it cannot be taken to pay off unsecured debts.
The amount protected varies depending on the state’s laws and the individual’s situation. If the equity in the home is less than the allowed exemption, the individual can typically keep their home in a Chapter 7 bankruptcy, provided they stay current on their mortgage payments. If the equity is significantly more than the exemption, the trustee might sell the home to pay creditors.
One of the primary benefits of Chapter 13 bankruptcy for homeowners is the ability to halt foreclosure and catch up on missed mortgage payments over time through the repayment plan. The Chapter 13 repayment plan is a detailed blueprint outlining how the debtor will pay off their debts in a span of three to five years.
For mortgages, the plan usually breaks down the overdue amount into manageable monthly payments, in addition to the regular mortgage payment. By adhering to the plan, a debtor can gradually repay their arrears while maintaining their current mortgage obligations. The home remains with the debtor if they continue to meet the payments as outlined in the plan.
It’s important to note the repayment plan only covers arrears on the primary residence mortgage. Other property-related debts may be handled differently. This repayment process gives the debtor control and stability in managing their mortgage debt.
When discussing bankruptcy, the impact on second or third mortgages often raises questions. These additional mortgages, also known as home equity loans or lines of credit, are treated as secured debts in a bankruptcy, but their handling can differ in Chapter 7 and Chapter 13.
In a Chapter 7 bankruptcy, these additional mortgages remain as liens against the property. Despite discharging personal liability for these debts, the lenders can still foreclose if payments aren’t made.
In a Chapter 13 bankruptcy, it may be possible to “strip” or remove second or third mortgages if the home’s value is less than the balance on the first mortgage. This process effectively changes these additional mortgages into unsecured debts, which are often paid a small fraction and then discharged. However, if the house value covers part or all of these additional mortgages, they remain secured and must be paid in full.
When a person files for bankruptcy, they may have the option to sign a reaffirmation agreement with their mortgage lender. A reaffirmation agreement is a legal document stating the debtor will continue to be liable for the mortgage debt, even after the bankruptcy process is complete.
In a Chapter 7 bankruptcy, entering into a reaffirmation agreement means the individual agrees to keep making their mortgage payments and takes on the responsibility for the debt again. This choice might make sense for individuals who can afford their mortgage and want to keep their home.
However, a reaffirmation agreement comes with risks. If the individual fails to make the payments after the bankruptcy, the lender can foreclose on the home and potentially sue for any deficiency, which is the difference between the amount owed on the mortgage and the home’s sale price.
When a person files for bankruptcy, it has a significant impact on their credit score. Both Chapter 7 and Chapter 13 bankruptcies can stay on a person’s credit report for several years, potentially making it harder to qualify for credit or loans in the future. This includes refinancing a mortgage, which typically requires a solid credit history.
However, bankruptcy doesn’t mean an end to all future credit opportunities. Over time, by demonstrating responsible financial behavior, an individual’s credit score can gradually improve. A person can start rebuilding their credit soon after bankruptcy by making timely payments on any remaining debts, like a reaffirmed mortgage or a car loan.
Regarding refinancing, it might be more challenging immediately after bankruptcy, but it isn’t impossible in the long term. As the bankruptcy fades into the past and the person’s credit improves, they may become eligible to refinance their mortgage.
Emerging from bankruptcy after a mortgage crisis can feel like starting over. However, with careful steps, rebuilding financial health is achievable. The first step is creating a budget focused on living within means and saving for unexpected expenses. This helps avoid accumulating more debt and provides a safety net for future financial uncertainties.
Timely payments on remaining debts or new, smaller lines of credit can help rebuild a credit score over time. Secured credit cards or small installment loans can be a good starting point, as they are often available to individuals with poor credit.
Education is also important. Learning about credit, debt management, and personal finance can help individuals avoid future financial pitfalls. Free or low-cost resources are available online and through community programs.
Lastly, building an emergency fund and saving for retirement should be a long-term goal. Even small contributions can add up over time, contributing to a stronger financial future.
While many strive for a secure financial future, unexpected events like mortgage debts can derail these plans. It’s essential to be informed about potential challenges, such as the rise in mortgage delinquencies in Wisconsin and to be aware of the regulatory changes aimed at reducing foreclosure threats. Thankfully, organizations like Debt Advisors offer resources and advice for those who can’t manage their mortgage payments, providing a beacon of hope in uncertain times.
If you are filing for bankruptcy, contact us or call us at 866-696-6432 today for a free consultation.
Learn about bankruptcy protections, types of bankruptcy, how to get started, what to expect, and who to trust. Filing bankruptcy is the ONLY way to completely eliminate debt. If bankruptcy is right for you, it offers powerful protections that cannot be achieved through alternative solutions such as hardship relief, loans, or debt settlement.
