How Will Filing Chapter 7 Bankruptcy Affect Your Mortgage?

If you are overwhelmed with debt and think you want to file bankruptcy have you considered how will filing Chapter 7 bankruptcy affect your mortgage? All bankruptcies are not created equal. The law allows for different types of bankruptcy that have different results and consequences.  You have probably heard of Chapter 13 and Chapter 7 bankruptcies; this may be oversimplifying their differences but in Chapter 13 you work out, under court direction, a debt repayment plan which you are obligated to maintain. In Chapter 7 bankruptcy your debt can be discharged (no repayment plan) but all of your assets are subject to sale by a court appointed trustee so that your debts can be repaid.

You may be thinking - what about my house? Even if think you can afford to continue making payments, you must be wondering "how will filing Chapter 7 bankruptcy affect my mortgage?"  Under Chapter 7 bankruptcy, depending on the amount of equity you have in your home and the state that you live in you may not need to worry about your mortgage because your court appointed trustee might order the sale of your home to access the equity to pay your debts.

However - and this is a situation where our current upside down real estate market may benefit you - if you can afford to continue making your mortgage payments (and are current on those payments) the good news is that you may not have that much equity in your home, and you will at least have the option of protecting your house from liquidation under the Homestead Exemption. The amount of equity you are allowed to keep under the Homestead Exemption varies wildly from state to state, so it is critical that you contact a bankruptcy lawyer as soon as possible to discuss the laws in your state and how they will impact your ability to stay in your home.

If the stars in your state align for you, and your equity position is favorable to keeping your home, and you've been able to stay current on your payments that you may be able to sign an agreement with your mortgage lender called a "reaffirmation agreement". In a reaffirmation agreement you will be signing an agreement that states you fully agree that this debt, your mortgage, is not being discharged in the bankruptcy and that you are obligated to stay current with timely payments or risk future foreclosure.