Will Filing Bankruptcy Save My House?

Today's question is, will filing for bankruptcy save my house? 

That depends. There are two types of bankruptcies applicable to a distressed homeowner situation.

The first is a Chapter 7 bankruptcy and the second is a Chapter 13 bankruptcy. 

Typically, one is used to simply forfeit the home, walk away, surrender the house, and let the bank foreclose. The other is used as a home-preservation option, a restructuring or a reorganization of debt.

In the case of a Chapter 7. 

You're not intending to save your home, you're sort of scorching the earth. You're discharging all of your debts, you're eliminating all of your unsecured debts, your secured debts, your mortgage debt, any home equity line of credit, junior liens, etc., so that you can walk away scot-free. While a Chapter 7 may not be your best option as far as a home-retention option is concerned, a Chapter 7 can be a very, very good option for folks who are simply trying to get out from underneath the weight of their unsecured debt. 

What I mean by unsecured debt is debt that is not secured by collateral. For example, credit card debt or medical bills. If you find yourself in a situation where you have $30,000 in credit card debt and $20,000 in medical bills and your income has been cut in half because of a reduction in salary at work or you've been demoted or a job loss or divorce or what have you, and you simply can't keep up with those payments and you don't want to be garnished, in that case a Chapter 7 would probably be a viable option for you.

In the alternative, however, if the hope is to keep your home, then you may want to explore the option of Chapter 13 bankruptcy. 

Like I said before, a Chapter 13 is a restructuring or a reorganization of your debt that affords you the opportunity to get caught up on your arrears, the past due payments that you've missed during your hardship period. Chapter 13 is typically appropriate for those folks who experienced a short-term hardship and fell behind on their mortgage.

 A Chapter 13 gives you a chance to get caught up, to bring the account current, and reinstate the loan by paying back those arrears over a fixed period of time, typically between three to five years.

By agreeing to file a Chapter 13 bankruptcy, you're committing yourself to making those payments pursuant to the Chapter 13 plan over that fixed period of time. These are monthly installment payments that go towards not only paying back the arrears balance, but also paying back any sort of unsecured debt you might have. 

You pay that portion of the arrears balance over that time in addition to making your monthly mortgage payments. 

If your original monthly mortgage payment was $1,500 and under the plan you're paying $350 a month to get caught up on the arrears balance, then you're looking at $1,850 for the next three to five years, depending on the nature of the plan. As soon as you've paid off the arrears balance, as soon as you've reinstated your loan, that $350 a month, that installment payment, essentially drops off and you're simply left paying your original monthly mortgage payment, pursuant to the original terms of the loan. 

Assuming that you're recovered financially after a brief hardship period, a Chapter 13 will enable you to get caught up on the past due payments and help you save your home.

If you have any questions about whether or not you qualify for a Chapter 13, please don't hesitate to give me a call.

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