If you think you can get rid of your current U.S. mortgage and keep your home through personal bankruptcy, you may have to rethink that strategy. Bankruptcy may not help you to keep your home or get rid of a lien, according to Nolo. In fact, depending on the situation, it may complicate matters.
Filing and Your Mortgage
When you file for Chapter 7 bankruptcy, you can continue to make your mortgage payments if want to keep your home and it is considered an exempt asset by the court. If you choose not to make payments on your mortgage, your personal liability towards the loan will be discharged at the end but the bank’s security interest in your home remains intact.
That means it has the option to foreclose and resell your home to recoup the loss. If you are behind in your payments at the time of filing and want to keep your home, you need to catch up on your payments and continue them. For Chapter 13, you can continue to make your payments during your bankruptcy repayment schedule even if it’s arrears. As long as you make your planned payments as well as your mortgage, the bank will not foreclose.
Beware of Modifying Your Mortgage
The good thing is that during bankruptcy, the bank cannot hike mortgage interest rates or find other ways to punish filers. In some instances of Chapter 13 bankruptcy, you can do a cram down. That means that if your mortgage was for $100,000 and the value has declined to $80,000, you could modify the mortgage amount to the lower number, but there’s a catch: you cannot use a cram down for primary residences. This type of modification can only work for multi-unit buildings, lots, mobile homes, or any other structure that’s not a part of your residence; you can even use it for your car loan. Another catch is that if you do modify your loan, it must be paid off through your repayment plan, which is three to five years. Depending on the size of the modified loan, such a short repayment schedule may not be feasible.
Getting a Home Loan after Bankruptcy
While it may be difficult, you can get mortgage, or even refinancing, after bankruptcy. The key point to remember is that if you are currently in the process of bankruptcy, no mortgage lender will speak to you. You will need to make sure your credit report reflects the accurate information and use a secured credit card to rebuild your credit. After a waiting period of about two years after discharge, you can get yourself ready to start the mortgage loan conversation. Lenders will be looking at your debt to income ratio, stability and other factors, especially your down payment amount.
Remember that even if you manage to rebuild your credit score and have everything else in perfect order, you may still be haunted by that bankruptcy on your credit report because the lender’s underwriting standards are strict. Shop around. You may not be able to get the best rate, but you will have some good options.