Does Chapter 7 and 13 Bankruptcy Affect My Mortgage

When homeowners found themselves saddled with making mortgage payments as well as paying off consumer debt such as credit card debt, the most popular option was to file for Chapter 7 bankruptcy protection in order to handle the consumer debt. This would allow them to concentrate on making their monthly mortgage payments.

Since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed into law, however, it has become much harder for people to file for Chapter 7 bankruptcy protection. Consequently, many people have started asking themselves how Chapter 7 and Chapter 13 really affects their mortgages.

Chapter 7 and 13 Bankruptcy - How Does it Affect My Mortgage: Chapter 7

When filing for Chapter 7 bankruptcy protection, the good news is that if there is some substantive equity built up in your home, you can list that equity as non-exempt property by using the homestead exemption. The precise details of the homestead exemption are determined by state law. Which state law applies to your particular financial situation depends on which state you have lived in for the past two years.

Unfortunately, since the 2005 bankruptcy reform bill was passed, one crucial aspect has been changed. Before that law was passed, if the debtor owned their home and had a mortgage on it, filing for bankruptcy did not constitute a breach of the loan agreement. However, after the 2005 bill was passed, filing for bankruptcy did constitute a breach of the loan contract. This means that the lender can still foreclose on your home if you file for bankruptcy.

Even if your home does not qualify as exempt property, the mortgage lender can still take it from you. It's no wonder so many people chose to default on their mortgages after the bill was passed: at least this way they stood a chance of staying in their homes a little while longer.

Chapter 7 and Chapter 13 Bankruptcy - How Does it Affect My Mortgage: Chapter 13

The good news is that you can avoid foreclosure if you file for Chapter 13. You should still seek help from a licensed, experienced bankruptcy attorney to help you with the process. Chapter 13 consolidates all of your debts and sets up a repayment plan that is designed to help you repay your creditors according to your financial circumstances. The typical scenario is that the mortgage loan will be fully repaid within three to five years.