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Why Your Mortgage Status Should Affect Your Choice of Bankruptcy Chapter

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Consider your mortgage carefully when filing bankruptcy

Image by Sam Beasley via Unsplash

As a Wilmington consumer considering bankruptcy, you have two options - Chapter 7 and Chapter 13. If you own a home, before selecting the type of bankruptcy you want, you should consider how it will affect your mortgage. Choosing wisely when filing bankruptcy can help make sure you keep your home if you want to or help get rid of an unaffordable property you no longer want or need. Here’s a look at why your mortgage status matters when choosing your bankruptcy chapter.  

How Chapter 7 Affects Your Mortgage

To understand how Chapter 7 bankruptcy affects your mortgage, you need to know the difference between a loan and lien. A loan is money your bank gives you to buy a home. Because the house you bought secures the loan, the bank holds a lien on the property to protect their investment. This means that the bank can foreclose your property to recover the loan and thus, it is secured debt.

When you file for Chapter 7 bankruptcy, you are not legally obligated to pay back the loan on your house. However, the keyword here is “legally obligated” because while Chapter 7 bankruptcy removes your legal obligation to repay the loan, it doesn’t remove the bank’s lien on your property. This means that the bank will foreclose your house if you do not pay back your loan.

The good thing about Wilmington bankruptcy is that most of your unsecured debts will be discharged in Chapter 7. This gives you extra funds in your budget to continue paying your mortgage under chapter 7. If you’re current on your Wilmington mortgage and choose Chapter 7 to deal with other debts, your mortgage will survive because you haven’t violated the terms of your contract.

However, if you haven’t kept up with your payments and are delinquent, Chapter 7 won’t help you save your home in the long run. In the short run, filing Chapter 7 will stop a foreclosure for 90 days (or more if the lender doesn’t follow up promptly), but it won’t save your home if you’re behind on payments. But if you want to be rid of a home, or need to buy time to move, Chapter 7 may help.

How Chapter 13 Affects Your Mortgage

Filing a Chapter 13 bankruptcy does not have to affect your mortgage – or it can impact it greatly. If you’re current on your loan, you can continue making mortgage payments during and after the bankruptcy. However, if you’re behind on your mortgage, Wilmington Chapter 13 can help save your home. As part of your debt repayment plan, you catch up on delinquent payments.

Also, you must pay your regular monthly mortgage payment. The debt repayment plan will last three to five years. So long as you continue making your regular mortgage payments and keep up with your repayment plan, your creditor can’t foreclose your home. This gives you time to catch up and lets you save your home. But there are even more benefits under Chapter 13.

In some instances, filing for Chapter 13 bankruptcy can help you remove a second or third mortgage on your home using lien stripping. In lien stripping, if the equity in your home isn’t enough to secure the second and third mortgages, the bankruptcy court can strip the liens and reclassify it as unsecured debt. You should pay far less than face value on unsecured debt.

To determine if your second or third mortgage or home equity line of credit can be converted, consider the value of your home. For example, if your home is worth $150k and your mortgage is $140k, you have $10k of equity supporting your second mortgage. Suppose your second mortgage is $40k. Of that, $10k is secured by the equity and the other $30k could be reclassified to unsecured.

What matters when considering bankruptcy is whether you’re current on your mortgage, how much equity you have, whether you want to keep the home, and whether you can afford to keep the home. To find out more, contact the Law Offices of John T. Orcutt to discuss your mortgage and debt. Read reviews from satisfied clients then call +1-888-234-4190 for a free Wilmington bankruptcy consultation at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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