If you are behind on payments, Chapter 7 may help save your home in some cases
Image Source: Flickr User Brian Jeffery Beggerly
Chapter 13 and Chapter 7 bankruptcy can both put a stop to foreclosure of your home. But if you’re behind on your mortgage payments, a Chapter 7 may mean you could lose your home if you don't try to remedy the delinquent balance. In some cases, letting a home go can be a positive move in the long run. If you’re upside down on your loan, if your home is in disrepair, if you can no longer afford the mortgage or the home doesn’t work for your family anymore, you may want to let it go. But if none of these apply and you want to try and keep your home – Chapter 7 bankruptcy can help in some cases. Here's how.
How foreclosure impacts loan modifications
If your home is a good value for the market you're in or you have equity in the home, trying to keep it can make sense. And being behind on payments doesn’t not necessarily mean you can’t try to save it via a loan modification. But what can impact your odds of getting a HARP or HAMP modification is your debt-to-income ratio.
Even if the modification would be affordable compared to what you’re paying now, if you have too much credit card or medical debt piled up, you can be turned down because of an unfavorable debt-to-income ratio. With a Chapter 7 bankruptcy, though, you can ditch most of your unsecured debt, including any arrears on Home Owner’s Association (HOA) dues and fees.
The bankruptcy may affect enough change to your debt-to-income ratio so that you may be able to get a loan refinance with your lender, another lender, or via a government program like HAMP (Home Affordable Modification Program) or HARP (Home Affordable Refinance Program). Typically, HAMP and HARP look for a max of 45% debt-to- income ratio.
Why you may want to think twice about a modification after bankruptcy
However, just because you can save your home with a Chapter 7 bankruptcy followed by a HAMP, HARP or other mortgage modification doesn’t mean that you should. Here’s why. If you get the modification then can’t keep up with the payments, you won’t have the option to wipe that debt off your credit report if you end up in foreclosure.
That means your credit report will take a hit from the bankruptcy then, just as you’re recovering, it will be hit by a foreclosure that can put it into a tailspin. However, if whatever issue that caused your financial crisis is over and done with – such as unemployment, divorce, accident or illness- so you know you’re on firm financial footing now, it may be a good option to pursue.
You may also be able to file Chapter 7 bankruptcy, pursue a HAMP, HARP, or other modification and, if you are denied, dismiss the initial Chapter 7 then refile a subsequent Chapter 7 to include the mortgage debt. Another consideration is whether you reaffirmed the mortgage during the bankruptcy.
You may want to try Chapter 13 and a modification before considering Chapter 7
Another option is to try Chapter 13 first and file for a loan modification. The chapter 13 is less sweeping debt relief, but may be enough to get the loan modification you need. If it doesn’t work out or didn’t reduce your debt enough, you can dismiss the Chapter 13 and pursue a Chapter 7 instead.
Mortgage refinance and bankruptcy are complex areas of finance and law. Don’t go it alone. Speak to a reputable bankruptcy attorney and lay out your debt scenario, your goals when it comes to your home, and get their advice on your best approach.
If you live anywhere in NC, contact the Law Offices of John T Orcutt for a free North Carolina bankruptcy consultation. Call +1-919-646-2654 now to get an immediate appointment at one of our offices in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.