Bankruptcy is a bummer. No one has ever said “OH MAN! I’m so excited to file bankruptcy! It’s going to make everything so awesome!” That being said, sometimes it needs to be done. If you have explored all of the alternatives and have decided to file bankruptcy, it’s important that you know what your options are and how they will impact your existing mortgage, or your future ability to obtain home loan financing.
What’s the difference between Chapter 7 and Chapter 13?
Chapter 7 bankruptcy is also known as total bankruptcy. It’s a wipeout of many (or all) of your debts. Also, it might force you to sell, or liquidate, some of your property in order to pay back some of the debt. Chapter 7 is also called “straight” or “liquidation” bankruptcy. Basically, this is the one that straight-up forgives your debts (with some exceptions, of course).
Chapter 13 bankruptcy is more like a repayment plan and less like a total wipeout. With Chapter 13, you file a plan with the bankruptcy court detailing how you will repay your creditors. Some debts will be paid in full, some will be paid partially or not at all, depending on what you can afford. Chapter 7 = wipeout. Chapter 13 = plan.
How does Chapter 7 bankruptcy affect my existing mortgage?
When you file Chapter 7, your existing property will either be deemed exempt or nonexempt. Exempt means you will be able to keep the property throughout the bankruptcy process. Nonexempt means you will either be required to surrender the property or pay its value in cash as a part of the bankruptcy. In some cases, people are allowed to keep nonexempt properties. It all depends on the bankruptcy trustee and how they choose to handle the property.
To understand how chapter 7 impacts your existing mortgage, you must first understand the difference between a loan and a lien.
When you get a mortgage, your mortgage company gives you a loan. They let you borrow money in order to buy a property. When they do that, they have a lien on the property. A lien is a right or interest in the property that the mortgage company has until the debt (or loan) is paid in full.
When you file Chapter 7, you are no longer legally obligated to repay the loan. “Legally obligated” are the key words here because Chapter 7 does not get rid of the lien on the property. Your lender still has a right to the property if the debt is not paid. So basically, you don’t have to pay your mortgage. But if you don’t you will lose your property because your lender will likely enforce the lien they have. If you are able to keep your home as part of Chapter 7, it’s probably a good idea to do everything in your power to keep paying your mortgage.
How long do I have to wait after Chapter 7 to get a new mortgage?
Most reputable lenders, including Quicken Loans, will not consider you for financing until two years after the Chapter 7 bankruptcy has been discharged. If you find a lender who will consider you prior to two years, make sure you are fully aware of all the terms and conditions included in your mortgage. Really scrutinize the details and look at all the costs to ensure you’re not being scammed.
Ok, what about Chapter 13? What happens with my existing mortgage?
With a chapter 13 bankruptcy, you will not lose your property. You will include details on how you plan on paying your mortgage in your repayment plan. In most cases, an automatic stay is issued once Chapter 13 is filed. An automatic stay means that creditors must stop collection efforts. It was designed to temporarily halt foreclosure and stop repossession of homes regardless of the stage of the foreclosure proceedings.
How long do I have to wait after Chapter 13 to get a new mortgage?
Most reputable lenders, including Quicken Loans, will not consider you for financing until at least one year after the Chapter 13 bankruptcy has been discharged. Some exceptions are made for US veterans. If you find a lender who will consider you prior to one year, make sure you are fully aware of all the terms and conditions included in your mortgage.
Filing for bankruptcy is a big decision that has a lot of implications for your current and future financing. Make sure you discuss your options with a lawyer or your financial advisor before you stop making payments or file for bankruptcy.