What Happens to Mortgages in Bankruptcy

Filers with a mortgage in foreclosure, or with significant home equity, will turn to Chapter 13 to keep a homeā€”not Chapter 7. Find out why.

No one wants to lose their house—and you might not have to if you file for bankruptcy. Understanding how mortgages work in Chapters 7 and 13 is key to keeping your house after filing for bankruptcy:

  • In Chapter 7, you must be current on your payment, exempt home equity, and continue paying after bankruptcy.
  • In Chapter 13, you must make your monthly payment, catch up on arrearages, and pay for any nonexempt home equity through the repayment plan.

Technically, a car loan is a "mortgage," too—here's where you'll learn about vehicles in bankruptcy. And don't forget our quick ten-question bankruptcy quiz. It can help you spot potential bankruptcy issues fast.

Protecting Mortgages With a Bankruptcy Exemption

You likely already know that your first step is checking whether you can protect your home equity with a bankruptcy exemption. Your state will probably offer one, maybe two exemptions that you can use for your house.

A homestead exemption protects home equity, but if it isn't enough, look for a wildcard exemption that you can use on any property of your choice. Many states will let you stack a wildcard on another exemption. Just be sure real estate isn't excluded.

What will happen if you can't exempt all of your home equity? It will depend on the chapter you file.

What Happens to Mortgages in Chapter 7 Bankruptcy

Chapter 7 is a popular choice because most Chapter 7 cases end after about four months. But Chapter 7 won't help you save a house from foreclosure. It doesn't have the proper mechanisms built into the Chapter 7 process.

Here's what you'll need to do to keep your home in Chapter 7:

  • Be current on your mortgage. The lien rights let the lender take your home if you're behind on the payment. The lender can ask the court to lift the automatic stay order stopping collections or wait until the case closes.
  • Protect all equity with an exemption. Otherwise, the Chapter 7 trustee will sell the home and refund you the exemption amount. Anything remaining after sales costs and the trustee's fee goes to creditors.

Even if you can meet both Chapter 7 requirements, you'll want to learn about the valuable benefits available in Chapter 13.

What Happens to Mortgages in Chapter 13 Bankruptcy

Unlike Chapter 7, the Chapter 13 trustee won't sell your nonexempt property. But that doesn't mean you get to keep more property in Chapter 13 than Chapter 7. Instead, you'll pay for it.

Here's how to keep a house in Chapter 13:

  • Pay the monthly payment and arrearages. You must have enough income to cover the monthly payment, plus arrearages. You can spread the overdue portion over the plan length.
  • Pay for nonexempt equity. You can exempt equity in Chapter 13, but you'll reimburse creditors for any nonexempt amount through the plan.

This might sound simple, but calculating a Chapter 13 repayment plan can be tough. Not only will you pay for any other nonexempt property you own, but you'll also pay some debts in full—like tax balances and support arrearages. You'll pay even more if your disposable income is high.

Reducing a Mortgage in Chapter 13 Bankruptcy

Can someone really reduce a mortgage balance in Chapter 13? Absolutely. But it's not easy. Here's how lien stripping and loan cramdowns work in Chapter 13.

  • If the mortgaged property is your residential home, and you can prove that you owe more than your home is worth, you can strip off a wholly unsecured junior loan. A loan is unsecured if, after selling the house, not one penny would be available to pay the stripped loan.
  • If the mortgaged property isn't your residence, such as a rental property, the rule is a bit different. You can reduce the mortgage amount to reflect the property's value. But—and this is a big one—you must pay off the entire reduced balance in the repayment plan.

These options are tricky and require you to present admissible evidence at a motion hearing or adversary proceeding. A local bankruptcy lawyer can help you determine whether your property would qualify for a balance reduction.

Getting Your Lender to Modify Your Home Loan

The lender might modify your home loan so that the payments are more affordable. Your local bankruptcy lawyer will be in the best position to explain your options.

Navigating Your Bankruptcy Case

Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.

The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.

More Bankruptcy Information

Bankruptcy Forms

Schedule A/B: Property

Schedule C: The Property You Claim as Exempt

Statement of Intention for Individuals

Related Information

Can You File for Bankruptcy If Your House Is in Foreclosure?

How to File Bankruptcy Without Losing a Car

Your Car in Chapter 13 Bankruptcy

Need More Info?

We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.

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