How Does Bankruptcy Affect Your Mortgage?

how does bankruptcy affect your mortgageMortgages contribute to a lot of financial strain for many Arizona families. According to December 2017 statistics, Americans owed 139 billion dollars in mortgage debt. In 2018, the total mortgage debt reached 10.3 trillion dollars and the average mortgage balance reached 148,060 dollars.

Occasionally, mortgage debt could become unmanageable. If you’re facing such a situation, you may be wondering whether bankruptcy will provide a chance to address the situation.

The Effect of an Arizona Bankruptcy Filing on Your Mortgage

Bankruptcy will affect your mortgage but the impact is going to be dependent on the type of bankruptcy filing you choose.

If you do a Chapter 13 bankruptcy filing, the liability to the bank that granted you the mortgage remains in place. The only difference is that your bankruptcy trustee will come up with a repayment plan that could reduce some of the financial burden and make it easier for you to get on track with the payments.

Those who qualify for a Chapter 7 bankruptcy filing will typically have their outstanding mortgage balance discharged. Keep in mind, however, that mortgages are secured by your home. You may keep the house after declaring a Chapter 7 bankruptcy if it falls under the Arizona bankruptcy exemption. If this isn’t the case, non-exempt property will be liquidated in the bankruptcy to pay off a portion of your debt.

Should You Still Make Mortgage Payments?

It’s in your best interest to continue making mortgage payments, even if you are considering an Arizona bankruptcy filing.

A bankruptcy filing does not eliminate liens from your property. While there may be some exceptions, a mortgage provider’s lien will most often survive the bankruptcy process (even if you’re doing a Chapter 7 filing). Thus, if you are interested in keeping your home, you will have to continue making mortgage payments in the event of a bankruptcy filing.

One exception is a wholly unsecured second mortgage. This is the type of loan that you could potentially get rid of without repercussions through a bankruptcy filing.

The rule here is simple – if your first mortgage balance exceeds the value of the property, you can eliminate a second mortgage via a Chapter 13 bankruptcy filing. The process is called lien stripping but keep in mind that you will still need to make the payments on your first mortgage.

If you cannot make a payment, you will be protected to a degree by the automatic bankruptcy stay. As soon as you do a bankruptcy filing, a creditor will lose their right to contact you or initiate collection efforts. Prolonged failure to pay, however, could get the creditor to petition the court to lift the automatic stay. Such a request will typically be granted, unless you can prove that you’re facing severe financial hardship that’s keeping you from fulfilling your mortgage’s conditions.

Are There Options Other Than Bankruptcy to Pursue?

You probably feel hopeless and completely confused because you currently don’t have the financial resource to pay off your mortgage. Bankruptcy filings can be helpful in such situations but you have to be fully aware of the consequences of doing a filing.

Talk to an Arizona bankruptcy attorney to understand the long-term effects of the bankruptcy. Knowing the pros and the cons will make it easier for you to determine whether this option is the best way to get out of debt.

Before doing a bankruptcy filing, you can always attempt communicating with your mortgage provider for the purpose of modifying the loan’s terms and conditions.

When you can demonstrate financial struggles, you may potentially get a modified repayment plan that will take some of the burden off your shoulders. There are also governmental modification programs (the Home Affordable Modification Program or HAMP is one of them) that will lower the monthly payments. A reputable attorney can also advice you about such opportunities and pinpoint the best ways to reduce mortgage installments.

Click here for information on filing bankruptcy without an attorney in Arizona.