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Chapter 13 Bankruptcy and Mortgages

Are you facing financial difficulties and wondering how Chapter 13 bankruptcy could affect your mortgage? Understanding the intricacies of filing for bankruptcy and its relationship with mortgages is crucial for making informed decisions about your financial future.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a legal process that allows individuals with regular income to reorganize their debts and develop a repayment plan over a specific period, usually three to five years. Unlike Chapter 7 bankruptcy, which involves liquidating assets to repay creditors, Chapter 13 focuses on creating a structured repayment plan while protecting your assets, including your home.

How Does Chapter 13 Bankruptcy Work?

When you file for Chapter 13 bankruptcy, you propose a repayment plan to the court based on your income, expenses, and the amount of debt you owe. The court reviews your proposed plan and determines if it is feasible and fair to your creditors. If approved, you make regular payments to a bankruptcy trustee, who then distributes the funds to your creditors according to the plan, which allows you to catch up on missed mortgage payments and may provide options for reducing the principal balance on certain debts.

Chapter 13 vs. Chapter 7

When considering bankruptcy, it’s important to understand the differences between Chapter 7 and Chapter 13 bankruptcy to determine which option is most suitable for your financial situation. Let’s delve into the specifics of each chapter:

Chapter 13 Bankruptcy: Reorganization and Repayment

Chapter 13 bankruptcy, also known as the wage earner’s plan, focuses on reorganizing your debts and creating a manageable repayment plan. Here are some key features of Chapter 13 bankruptcy:

  1. Income Requirements: To qualify for Chapter 13, you must have a regular income that enables you to make monthly payments towards your debts.
  2. Protection of Assets: Chapter 13 allows you to keep your assets, including your home, while establishing a repayment plan to catch up on missed payments.
  3. Debt Repayment: Under Chapter 13, you will propose a payment plan to the bankruptcy court, detailing how you will repay your debts over a period of three to five years. The plan takes into account your income, expenses, and the amount of debt you owe.
  4. Debt Discharge: Upon successfully completing your Chapter 13 repayment plan, any remaining eligible debts are discharged, providing you with a fresh financial start.

Chapter 7 Bankruptcy: Liquidation of Assets

Chapter 7 bankruptcy, often referred to as straight bankruptcy or liquidation, involves the liquidation of non-exempt assets to repay your creditors.

  1. Means Test: To qualify for Chapter 7, you must pass the means test, which compares your income to the median income in your state. If your income is below the median, you typically qualify for Chapter 7.
  2. Asset Liquidation: In Chapter 7, a bankruptcy trustee may sell non-exempt assets to repay your creditors. However, certain exemptions protect essential assets, such as your home, vehicle, and personal belongings, up to a certain value.
  3. Debt Discharge: Once the liquidation process is complete, your eligible debts are discharged, relieving you of the responsibility to repay them. However, certain types of debts, such as student loans and child support, are generally not dischargeable.
  4. Timeline: Chapter 7 bankruptcy is typically a quicker process compared to Chapter 13, often lasting around three to six months from the filing date to the debt discharge.

The Impact of Chapter 13 Bankruptcy on Mortgages

One of the main concerns for homeowners considering Chapter 13 bankruptcy is how it affects their mortgages. Here are some important points to keep in mind:

  1. Automatic Stay: When you file for bankruptcy, an automatic stay is put in place, which halts foreclosure proceedings and provides temporary relief. This allows you the opportunity to catch up on missed mortgage payments and avoid foreclosure.
  2. Repayment Plan: Chapter 13 enables you to include your mortgage arrears in the repayment plan, allowing you to catch up on missed payments over time. This can help you avoid foreclosure and keep your home.
  3. Reducing Second Mortgages: In some cases, Chapter 13 bankruptcy allows you to eliminate or reduce the balance owed on second or subsequent mortgages if the value of your home is less than the outstanding debt on your first mortgage. This process is known as “lien stripping.”
  4. Protecting Your Home: Chapter 13 provides a means to protect your home from foreclosure while giving you the opportunity to reorganize your finances and repay your debts over a manageable period.

Can Chapter 13 Bankruptcy Help Me Save My Home From Foreclosure?

One of the primary benefits of Chapter 13 bankruptcy is the ability to halt foreclosure proceedings and catch up on missed mortgage payments through a repayment plan. This provides an opportunity to save your home and regain financial stability.

Will Chapter 13 Bankruptcy Eliminate My Mortgage Debt?

Chapter 13 bankruptcy does not eliminate your mortgage debt entirely. However, it provides a structured plan to catch up on missed payments and avoid foreclosure. Once you complete the repayment plan, you will continue making regular mortgage payments.

Can I Refinance My Mortgage While in Chapter 13?

Refinancing your mortgage while in bankruptcy is possible, but it can be more challenging compared to refinancing outside of bankruptcy. Here are some key considerations to keep in mind:

  1. Obtaining Bankruptcy Court Approval: To refinance your mortgage during bankruptcy, you will need to obtain court approval. This involves demonstrating that refinancing is in your best interest and aligns with your overall financial goals and the repayment plan.
  2. Showing Improved Financial Stability: Lenders will assess your financial stability and ability to make the refinanced mortgage payments. They will review factors such as your income, employment history, credit score, and debt-to-income ratio. It’s essential to show that you have a stable income and the ability to afford the refinanced mortgage payments.
  3. Equity and LTV Ratio: Lenders will evaluate the equity in your home and the loan-to-value (LTV) ratio when considering a refinance. If the equity in your home is limited or the LTV ratio is high, it may affect your eligibility for refinancing.
  4. Timing Considerations: Refinancing during bankruptcy is typically more feasible during the later stages of the repayment plan when your financial situation has improved and you have demonstrated responsible payment behavior.
  5. Lender Requirements: Each lender may have specific requirements and criteria for refinancing during bankruptcy. It’s crucial to research and reach out to lenders who have experience working with borrowers in bankruptcy situations.
  6. Costs and Fees: Refinancing involves certain costs and fees, such as closing costs and appraisal fees. It’s essential to factor in these expenses and ensure they align with the financial benefits of refinancing.

How Long Does Chapter 13 Bankruptcy Stay On My Credit Report?

Chapter 13 bankruptcy can remain on your credit report for up to seven years from the date of filing. However, its impact on your credit score lessens over time, especially as you demonstrate responsible financial management during the repayment period.

Take Control of Your Financial Future with JVM Lending

Navigating bankruptcy and its impact on mortgages can be a complex and daunting process. However, with the right guidance and expertise, you can successfully overcome financial challenges and protect your home. That’s why it’s crucial to seek the assistance of professionals who specialize in Chapter 13 bankruptcy, such as the experts at JVM Lending. With their in-depth knowledge and experience, they can provide you with personalized advice and help you make informed decisions about your mortgage and financial future.

Jay Voorhees
Founder | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167