How to Keep Your House in Bankruptcy

Fear of losing the house often prevents people from filing bankruptcy even when it’s the best path forward. But here’s what many people don’t realize: bankruptcy can actually be one of the most effective tools for saving your home from foreclosure. With the right strategy, keeping your house through bankruptcy is not only possible but often likely.

Understanding the Automatic Stay

The moment you file for bankruptcy, something powerful happens. An automatic stay goes into effect, which is a court order that immediately stops most collection activities against you. This includes foreclosure proceedings.

If your lender has scheduled a foreclosure sale, filing bankruptcy can stop it, even if the sale is days away. This automatic stay gives you breathing room to work out a solution with your lender and develop a plan to save your home. The foreclosure process simply freezes while your bankruptcy case proceeds.

This pause is invaluable. As Reed Law Firm, P.A. explains, “Filing for bankruptcy halts foreclosure proceedings, which gives you and your attorney time to negotiate with the lender. In most cases, we are able to get your mortgage on a payment plan or to negotiate a forgiveness of part or all of the owed mortgage debt, along with a lower interest rate on future payments.”

This breathing room is often all you need to get back on track and save your home from foreclosure. It shouldn’t be underestimated or overlooked.

Chapter 13: The Homeowner’s Bankruptcy

While there are different types of bankruptcy, Chapter 13 is specifically designed to help people keep their property, including their homes. Unlike Chapter 7, which liquidates assets to pay creditors, Chapter 13 reorganizes your debts into a manageable repayment plan over three to five years.

Here’s how it works for your mortgage. If you’ve fallen behind on payments, you don’t need to immediately pay all the back payments you owe. Instead, Chapter 13 allows you to catch up on missed mortgage payments gradually over the life of your repayment plan while continuing to make your regular monthly mortgage payments.

For example, if you’re $15,000 behind on your mortgage, you might pay that back at $250 per month over five years as part of your Chapter 13 plan while also keeping current on your regular mortgage payment.

Using Homestead Exemptions

Every state has homestead exemption laws that protect a certain amount of equity in your primary residence from creditors. These exemptions can be crucial in keeping your home during bankruptcy.

The homestead exemption amount varies significantly by state. Some states protect only a modest amount of equity, while others protect your home’s full value. If your home equity falls within your state’s exemption limits, your home is protected from being sold to pay your creditors.

Even in Chapter 7 bankruptcy, which can involve liquidating assets, you can keep your home if your equity is protected by the homestead exemption and you’re current on your mortgage payments. If you’ve fallen behind but have equity, Chapter 13 might be the better option, allowing you to catch up on payments over time.

Stripping Second Mortgages

One powerful but lesser-known benefit of Chapter 13 bankruptcy is the potential to strip off wholly unsecured junior liens. If your home’s value has dropped below what you owe on your first mortgage, any second mortgages or home equity lines of credit might be considered completely unsecured.

In Chapter 13, you may be able to remove these junior liens entirely, treating them as unsecured debt rather than secured debt. This can dramatically reduce your monthly housing costs and make keeping your home much more affordable. 

Modifying Your Mortgage

Bankruptcy gives you leverage to negotiate with your lender. Lenders know that foreclosure is expensive for them too. They often prefer working out an arrangement that gets them paid rather than going through the foreclosure process, selling the property at auction, and potentially recovering less than what’s owed.

Your bankruptcy attorney can negotiate with your lender for modifications to your mortgage terms. This might include reducing your interest rate, extending the loan term to lower monthly payments, or even reducing the principal balance in some cases. 

When You Can’t Keep the House

Sometimes, despite your best efforts, keeping the house isn’t realistic or even advisable. Your mortgage payment might be too high relative to your income, the house might be worth significantly less than what you owe, or you might need to downsize for other reasons.

Even in these situations, bankruptcy can help. It can allow you to surrender the house without owing a deficiency balance. It can also give you time to save money before moving, while allowing you to wipe out other debts so you can afford to rent or eventually buy another home.

Adding it All Up

Don’t let fear of losing your home prevent you from exploring bankruptcy as a solution. For many homeowners, bankruptcy isn’t the thing that costs them their house – it’s actually the tool that saves it. 

The path forward starts with understanding your options, honestly assessing your financial situation, and taking action before it’s too late. Here’s to the future!

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