If you are contemplating filing bankruptcy and own a home with a mortgage, how will filing Chapter 7 or Chapter 13 bankruptcy affect your mortgage? Can your mortgage company change any of the terms of the mortgage agreement if you file for bankruptcy? Will you lose your home? Can you continue to make your payments and keep your home? What if you are behind on some payments? These and other questions are usually the first questions that people ask before filing for bankruptcy.
How your mortgage is treated depends on whether you file for Chapter 7 or Chapter 13. If you are in Colorado and you meet the “means test” and choose to file for Chapter 7 bankruptcy, the issue with your home and mortgage will be how much equity you have and how much the Colorado homestead exemption is. In Colorado the homestead exemption is $60,000 ($90,000 if you are over 60 years of age). If the value of your home does not exceed the amount of the mortgage plus the applicable homestead exemption then your home will be considered “exempt.” In other words the Trustee assigned to your Chapter 7 case will not have any interest in your home. Therefore if you are current and keep making your mortgage payments you will be able to keep your home. The mortgage company cannot change any of the terms of the mortgage.
However, if you are behind on your mortgage payments at the time your file for bankruptcy or are in the process of a foreclosure of your home, the mortgage company will be able to obtain relief from the automatic stay provisions of the bankruptcy code and will continue with or start a foreclosure unless you are able to reach some kind of agreement with them to reinstate the mortgage. If the mortgage company does foreclose on your house, the bankruptcy will discharge you from any liability for any deficiency on the mortgage after foreclosure.
If you want to keep your home it is always best to catch up any missed payments before filing for Chapter 7 as there is no provision for paying a mortgage arrearage in Chapter 7. On the other hand, Chapter 13 does allow you to deal with mortgage payment arrearages in bankruptcy as it is a little more mortgage friendly than Chapter 7. If you are behind in mortgage payments, you can pay off the arrears through your Chapter 13 repayment plan (which lasts three to five years). As long as you make your current mortgage payments and your plan payments, the lender cannot foreclose. This effectively gives you more time to make up missed payments.
Chapter 13 also allows you to “strip off” Second and Third mortgages if your house is not worth more than the amount of the First mortgage. In other words, the Second or Third mortgages are treated as “unsecured” debts because the value of the collateral (your home) is less than the First mortgage so there is not enough collateral to cover the other mortgages. It does take some additional filings in the bankruptcy court and most bankruptcy attorneys will charge extra to strip off the liens, but it is usually worth it as you can then pay of a much smaller portion of the Second or Third mortgages over time in your Chapter 13 plan and still have the house and it will only be subject to the Frist mortgage after bankruptcy. You should talk to our experienced Colorado bankruptcy attorneys about your options with regard to your mortgage in bankruptcy.
If the value of certain property is less than the amount of the First mortgage you can sometimes modify a mortgage in Chapter 13 bankruptcy. The point is again that if the mortgage is more than the value, any amount over the value is not really “secured” by the property and may be treated as unsecured under the Chapter 13 plan. This process is referred to as a “cram down.” A cram down can be used for other secured property too, like car loans.
While this sounds wonderful, it’s not available for a mortgage secured by your residence (the home you live in). It’s only available for these types of mortgages:
- Loans obtained to purchase a multiunit building.
- Loans obtained to purchase other buildings or lots that are not part of your residence (e.g. farmland).
- Loans obtained to purchase a mobile home you live in that is personal property.
- Loans not secured solely by your residence (that is, some other property serves as security for the loan).
And the final kicker: If you are able to cram down (modify) the mortgage to the actual value of the property, you have to pay off the entire new mortgage amount through your Chapter 13 repayment plan. This gives you only three to five years to pay it off (depending on how long your plan is) — which makes a cram down unworkable for most people as they cannot make those larger accelerate monthly payments.
You can always try to get your mortgage company to modify your home loan so that the payments are more affordable. There are several government programs designed to encourage home loan modifications.
Whether bankruptcy is the right solution to your financial problems will depend on your individual situation, including the type of debts you have, and how much property you have and whether that property is exempt or not. If you are contemplating bankruptcy, you should discuss your options with an experienced Colorado bankruptcy attorney. A bankruptcy attorney can help you decide whether or not to file for bankruptcy. If you decide to file, an attorney can help ensure that your home and your mortgage is protected, all of your dischargeable debts are discharged, and your creditors do not violate your rights, so that when you complete your bankruptcy, you will be on the road to financial recovery.
If we can help you with the decision to file bankruptcy and to represent you through the bankruptcy process, please give us a call at (720) 457-5959 or http://familylawattorneyindenver.com