What Happens to Your House in Chapter 13 Bankruptcy?
You’ve probably heard that filing bankruptcy has major drawbacks, which it does. Filing can cause a significant drop in your credit scores and make it more difficult to get approved for loans, or even jobs in the future.
But bankruptcy can also have major benefits for those who are struggling with debt.
One of the main reasons to consider filing chapter 13 bankruptcy is that it automatically stops foreclosure proceedings and it can help you find an affordable way to stay in your home.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a legal solution for dealing with unmanageable debt. Filing chapter 13 allows people with regular income to get on a 3–5-year payment plan for paying back as much of their debt as they can afford.
At the end of the plan, some of your debt balances can be discharged, meaning you don’t have to pay the remaining bill. You will, however, have to continue making any payments that are due on your mortgage. But unlike chapter seven bankruptcy, chapter 13 can save certain property, including your home.
Here are a few important things to know:
- You have to make your regular mortgage payments while you’re on chapter 13 repayment, plus you’ll have to catch up on overdue payments, also known as “arrears.”
- Non-mortgage debt payments may become more affordable since they’ll be stretched out over your 3–5-year payment plan.
- In order to file, you’ll have to complete credit counseling and develop a debt repayment plan.
- You’ll have to pay multiple fees to file chapter 13, including attorney fees, trustee fees, a $235 case filing fee and a $75 miscellaneous administrative fee.
What Happens to Your Mortgage After Chapter 13 Discharge?
If you’re planning to file, you’re probably concerned about what happens to your mortgage after chapter 13 discharge.
Unlike other debts, your mortgage payments will not be discharged after you complete your payment plan. In other words, you’ll have to keep paying your mortgage in order to keep your home after you’ve completed your chapter 13 obligations.
Equity Exemption in Chapter 13 Bankruptcy
Another common concern for people considering bankruptcy is how their home equity will come into play.
Most states allow you to claim your home as “exempt” property in a bankruptcy, meaning that you won’t be required to tap into your home equity (or sell your home) in order to pay back your debt. It’s worth noting, however, that the law may view your first home differently than any additional properties you own.
If you’re wondering, “Can I keep my second home if I file chapter 13?,” or if you just want to know what happens to your house in chapter 13 bankruptcy, the best way to get answers is to speak to a bankruptcy lawyer.
Mortgage Arrearages while in Chapter 13
During your chapter 13 repayment, you’ll have to stay on top of your mortgage payments, but you’ll also be required to catch up on arrears, which are the overdue charges that you may have racked up before filing bankruptcy.
Junior Mortgages and HELOCs in Chapter 13
Dealing with loans that are backed by your home can be complicated in a chapter 13 bankruptcy.
If you can demonstrate that your equity doesn’t cover what you owe on a HELOC or a second mortgage, the debt may be removed from the home and treated the same as any credit card debt in your chapter 13 repayment. Once you complete your payment plan, the remaining balance can be discharged.
Partially Secured Home Mortgages in Chapter 13
A partially secured home mortgage is a debt that is backed by your home as collateral, but the home is worth less than what you owe on the debt.
If you have enough equity in your home to cover your first mortgage, plus some part of your partially secured home mortgage, the second loan will not be dischargeable.
Paying Your Mortgage while in Chapter 13 Bankruptcy
During chapter 13, your monthly payments will be made either voluntarily, or directly through a paycheck withdrawal. In either case, the payment is sent to your bankruptcy trustee, and the bankruptcy trustee will disburse the funds to your mortgage company and other creditors.
Even if you’re not required to set up automatic payments, it can be a good idea to choose this option, since it can help ensure you stay on track with your chapter 13 plan.
Can You Reduce Your Mortgage in Chapter 13 Bankruptcy?
It’s uncommon for mortgage payments to be reduced when you file bankruptcy.
If you’re looking to lower your payments, you might try working with your lender for a mortgage modification after you start your chapter 13 payments. If the lender does approve your modification, you’ll have to follow up by getting approval from the bankruptcy judge.
How Does Chapter 13 Bankruptcy Affect Foreclosures?
Filing a chapter 13 petition will pause any foreclosure proceedings that are in progress for your home, but that doesn’t mean your home is completely safe. Here are a few reasons you could face foreclosure after filing:
- Failure to make your monthly mortgage payments.
- The lender gets permission from the bankruptcy court to continue foreclosure proceedings.
Can I Sell My Home while in Chapter 13?
You will need permission from a bankruptcy judge to sell your home during chapter 13 bankruptcy. Additionally, your creditors may have objections.
If you make enough from the sale, you can use the proceeds to pay off the remainder of your payment plan and discharge your debt, or you may be allowed to keep the money for yourself.
Can You Get a New Mortgage While in Chapter 13 Bankruptcy?
Filing bankruptcy can make it difficult to buy a new home. Lenders generally won’t approve you for a new mortgage until several years after your chapter 13 discharge. You’ll also have to get permission from the bankruptcy trustee in order to take out the new loan.
Mortgage Alternatives to Filing Chapter 13
Bankruptcy can help you save your home by stopping foreclosure proceedings, but it may not be the only way to save your house. Here are a few other solutions to consider:
- Loan modification: Work with your lender to explore their options for saving your home. Be sure to ask about mortgage modification, which could include restructuring your payments in order to make them more affordable.
- Short sale: A short sale is an alternative to foreclosure where you agree to sell the home. In a short sale, the lender will typically forgive any difference between the sale amount and what you owe on your loan.
- Other help: Other agencies may be able to help with mortgage payments, such as Fannie Mae or Freddie Mac, if your loan is backed by one of the two agencies.
Talk to a Cre dit Counselor about Your Home Before Filing for Chapter 13 Bankruptcy
Filing chapter 13 can help you manage debt, but it’s not always the best solution. It can cause severe damage to your credit, and only about only about 35% of the people successfully complete their chapter 13 payment plan.
If you’re looking for a permanent solution to overcoming debt, a certified, nonprofit credit counselor can help. Yes, these professionals can take you through your mandatory bankruptcy counseling, but they’re also trained to examine your full financial situation, answer tough questions about money management and help you explore all of the options for keeping your home.
About The Author
Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC). Sarah can be contacted via sarahcbrady.com.
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