What Happens to Mortgages in Bankruptcy

Filing for bankruptcy won’t automatically cost you your house. In Chapter 7, you keep your home by staying current on the mortgage and exempting your equity. In Chapter 13, you keep it by paying the plan, catching up on any mortgage arrearages, and covering nonexempt equity through the plan. Here’s a quick look at how the two chapters compare, followed by the details on exemptions, reducing a mortgage, and buying a home again after your case closes.

What Happens to Your Mortgage in Chapter 7 Bankruptcy?

You keep your home in Chapter 7 as long as you’re current on the mortgage and can exempt your equity. If you’re behind on payments, Chapter 7 gives you no way to catch up, so assume you’ll lose the house. Many people go this route because it’s fast, with most Chapter 7 cases wrapping up in about four to six months. But it won’t save a house from foreclosure if you’re already behind on your mortgage.

Chapter 13 has a built-in way to catch up on a mortgage. Chapter 7 doesn’t. So if you’re behind on your mortgage before you file for Chapter 7, you'll likely lose the house. Here’s what it takes to keep it.

Be Current on Your Mortgage

Your mortgage lender holds a lien on your home, and that lien lets the lender take the property if you fall behind on payments. If you’re not current when you file, the lender can ask the court to lift the automatic stay—the order that stops most collection actions—or simply wait until your case closes to foreclose. (11 U.S.C. § 362.)

Protect All Your Equity With an Exemption

If you can’t cover your equity fully, the Chapter 7 trustee will sell the home, hand you the exemption amount, and pay the rest to creditors after costs and fees. Here's how to determine whether your home is at risk of being sold by the trustee.

Determine whether you can choose between the federal bankruptcy exemptions and your state's exemptions, if your state is one of the handful that allow it. Then check the homestead and wildcard exemption amounts and qualification requirements.

Reaffirmation Agreements

A reaffirmation agreement is a new contract entered into with a lender, and they're often used with car loans when the filer wants to keep the car after bankruptcy. However, you don’t have to sign a reaffirmation agreement to keep your home. (11 U.S.C. § 524.)

The mortgage debt itself will be wiped out, but the lien will remain, so the lender can recover the home if you don't continue to make your monthly payments. Some servicers may also stop reporting your payment history to credit bureaus once the debt is discharged without a reaffirmation agreement, so check with your servicer if you're relying on the mortgage to help rebuild your credit.

What Happens to Your Mortgage in Chapter 13 Bankruptcy?

In Chapter 13, you keep your home by paying the regular mortgage payment, curing any arrearage through your plan, and paying for any nonexempt equity. Unlike Chapter 7, the trustee won’t sell your property just because it’s nonexempt. Instead, you pay creditors to keep it.

Here’s what protecting your mortgage in Chapter 13 requires:

Pay the Monthly Mortgage and Arrearages

You’ll need enough income to cover the regular payment plus the overdue amount, which you can spread across the plan length. Whether you pay the monthly mortgage payment inside or outside the plan depends on the local rules in your jurisdiction. Paying it outside of the plan is preferable because it avoids the additional trustee fee of up to 10%, depending on your district's trustee. (11 U.S.C. § 1322.)

Pay for Nonexempt Equity

You'll use the homestead exemption (and a wildcard exemption, if your state offers one that can be applied to real estate) to cover your equity to the extent of the exemption. Whatever amount the exemptions don't cover, you reimburse to unsecured creditors through the plan. This falls within the "best interests of creditors" rule, which requires you to pay unsecured creditors in Chapter 13 at least as much as they would have received had you filed for Chapter 7.

Pay Mortgage Increases

Your payment can still move even after the plan is confirmed. If your loan has an escrow account for taxes and insurance, the servicer must file a notice of any payment change with the bankruptcy court and your plan payment must adjust to match. To prevent an escrow change quietly putting your plan in default, ask your attorney or trustee to flag these notices and take the steps to adjust plan payments or your direct mortgage payments accordingly. (FRBP 3002.1.)

How Much Will Your Chapter 13 Payment Be?

Calculating a Chapter 13 repayment plan gets complicated fast. On top of the mortgage, you’ll pay for other nonexempt property and cover certain debts in full, like tax balances and support arrearages. The higher your disposable income, nonexempt property, and priority debts, the more you’ll pay.

Getting a Mortgage After Your Bankruptcy Case

Most people qualify for a new mortgage within one to four years of their bankruptcy ending, and exactly when depends on the loan type and how much their credit has recovered.

• FHA loans usually require you to wait for two years after Chapter 7 discharge (sometimes one year with documented extenuating circumstances), and as little as one year into a Chapter 13 plan with court approval.
• VA loans follow a similar two-year wait after Chapter 7, with a possible one-year exception, and around one year into Chapter 13.
• Conventional loans usually mean a four-year wait after Chapter 7 discharge or dismissal (two years with extenuating circumstances), and typically two years after Chapter 13 discharge or four years after dismissal.

These clocks start on your discharge date, not your filing date, so take your discharge order when you start talking to lenders. Lenders also change requirements frequently, so view this as general guidance only.

Reducing a Mortgage in Chapter 13 Bankruptcy

Yes, you can reduce a mortgage in Chapter 13—through lien stripping or a loan cramdown—but neither is simple. (11 U.S.C. § 1325.)

• On your residential home, you can strip off a wholly unsecured junior mortgage if you can prove you owe more on the first mortgage than the home is worth. The junior loan is unsecured if selling the house wouldn’t leave a penny for it.
• On a property that isn’t your residence, like a rental, you can reduce the mortgage to the property’s value, but you must pay off that entire reduced balance through the plan.

Both moves require solid evidence of your home’s value and what you owe, presented at a motion hearing or adversary proceeding. A local bankruptcy lawyer can tell you whether your property qualifies.

Getting Your Lender to Modify Your Mortgage

Your lender might agree to modify your mortgage for lower payments, and some courts run a loss-mitigation or mediation program that lets you negotiate directly while your case is open. Any modification you land on usually needs court approval before it becomes part of your plan. A local bankruptcy lawyer can walk you through your options here.

Takeaways on Your Mortgage in Bankruptcy

You can keep a house in Chapters 7 or 13 as long as you can meet the requirements. The other option? Surrender a home with a high monthly payment, or that doesn't meet your needs, and qualify for a new mortgage within a few years after bankruptcy. A few related reads:

• Will I Lose All My Property If I File for Bankruptcy?
• What Happens in Bankruptcy If I Am on the Deed to Someone Else's Home?