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Does Having a Mortgage Affect Filing for Bankruptcy in California?

Filing for bankruptcy is often a difficult decision. Unfortunately, many people base their decision on a misunderstanding of the bankruptcy process. This is especially the case if they own a home and have a mortgage. The threat of losing their home is one reason why some individuals are reluctant to take advantage of the benefits of bankruptcy.

While a mortgage will affect your bankruptcy, it is rarely a negative one. In fact, in some cases, having a mortgage will make it easier to discharge unsecured debt. Furthermore, if you are behind on your mortgage, bankruptcy provides a mechanism to catch up on your back payments. If you are considering filing, talk with one of our Roseville, CA bankruptcy lawyers first.

Bankruptcy offers many people struggling with debt a means to get back on track – including those people with a mortgage. Do not let debt overwhelm you and your family. Contact The Bankruptcy Group at 1-800-920-5351 today.

What Happens to a Mortgage in a California Bankruptcy?

In most cases, if you own a home and are paying a mortgage, you could file for bankruptcy and keep your home. The bankruptcy will not impact your mortgage. You would just continue to make your monthly payments as if you never filed. However, there are some exceptions. It is important to discuss your mortgage in relation to the two types of available bankruptcies: Chapter 7 and Chapter 13.

Your Mortgage in a California Chapter 7 Bankruptcy

If you are filing Chapter 7, our California bankruptcy lawyers will look at your mortgage balance and the fair market value of your home. The equity, or the difference between your mortgage balance and the value of your home, is what could impact your bankruptcy case. Too much equity could make Chapter 7 unfeasible because you could lose your house. Fortunately, California offers debtors a way to protect a substantial amount of equity. As of January 1, 2021, California homeowners could protect up to $600,000 of their home’s equity.

You should be current with your mortgage when you file Chapter 7. Because Chapter 7 is designed to eliminate debt, there is no mechanism to reorganize your debt. Once you file, it is important to continue making your monthly mortgage payments.

When you receive your discharge, your personal obligation under your mortgage is discharged. However, unless you want to surrender your home, you must keep making monthly mortgage payments.

Your Mortgage in a California Chapter 13 Bankruptcy

If you file a Chapter 13 case, you can keep your home. You just need to continue to make your monthly mortgage payments. However, many people file for Chapter 13 specifically because they are behind on their mortgage payments. Either they fell behind and the mortgage company is threatening foreclosure, or there is a sheriff’s sale already scheduled. In either case, our California Chapter 13 bankruptcy attorneys could help you pay back what you owe and keep your home.

When you file Chapter 13, you will propose a bankruptcy plan to pay back some of your creditors, including your mortgage lender. Every month you will have to pay your regular mortgage payment directly to the lender. In addition, you will pay a monthly trustee payment that will pay back what you are behind over sixty months. This allows you to stay current on your mortgage while catching up through bankruptcy.

Once you complete a Chapter 13 case, your mortgage should be current, and your delinquent amount should be paid in full. If you have unsecured debt that you did not have to pay through bankruptcy, it will be discharged at this time. As with a Chapter 7 discharge, your personal obligation under the mortgage will also be eliminated. You still must keep paying your mortgage if you want to keep your house. A mortgage company may request a reaffirmation agreement. You should speak with our California bankruptcy lawyers before signing a reaffirmation agreement.

Reaffirming Mortgage Debt After a California Bankruptcy

A reaffirmation agreement is a contract with a secured creditor where a debtor “reaffirms” the debt. This means that despite the discharge, the debtor is still legally obligated to pay the debt. Typically, these agreements are only entered into when someone filed for bankruptcy and had a car loan. Because of the depreciation on a vehicle, a lender is trying to protect themselves if someone stops paying their car note. If you sign a reaffirmation and default on a car note, the lender could sue you for the entire remaining balance even though you received a bankruptcy discharge.

If you do not sign a reaffirmation agreement regarding your mortgage, the lender must accept your monthly payments. However, if you do not reaffirm your mortgage, the lender will not report your payments to the various credit bureaus. You can address this by sending a letter to each credit bureau once a year, indicating that you have made the required mortgage payments.

The advantage of not reaffirming your mortgage could be huge. If, at some point in the future, you do run into financial difficulties and lose your home to foreclosure, the lender is prohibited from suing you personally for any balance that might be owed under the mortgage.

Our California Bankruptcy Lawyers Are Available to Answer Your Mortgage Questions

The bankruptcy process is complicated. If you do not understand it, bankruptcy could feel intimidating. Our Folsom, CA bankruptcy lawyers are available to answer your questions about your mortgage, home equity, types of debt, and any other questions you have regarding filing for Chapter 7 or Chapter 13. Call The Bankruptcy Group at 1-800-920-5351 to schedule a free consultation.