Mortgages usually include two principal documents. The first document is your promissory note. It spells out the terms. It is your IOU. The second document is the lien on your property -- the collateral. When properly recorded, the lien serves as a public notice that the lender has a "security interest" in your property. A security interest will remain intact through and after bankruptcy proceedings, which means the mortgage is not forgiven.
Chapter 7 and Chapter 13 are the two main kinds of personal bankruptcy filings. A Chapter 13 filing is a "workout plan". When approved by the bankruptcy court, the plan allows you to repay your debts over a period of three to five years. Depending on what you can negotiate with your lender; you may be able to obtain a reduction in your mortgage payments. However the total amount of your mortgage indebtedness will likely not change.
The Chapter 7 filing is also called a liquidation bankruptcy. In this case, your assets, including your house, are at risk of liquidation by the bankruptcy trustee to satisfy your outstanding debts.
Keeping Your House While In Bankruptcy
If you are behind in your mortgage payments, you will likely lose your home in foreclosure by the lender, irrespective of a bankruptcy filing. Such a filing might delay the inevitable foreclosure, it will only buy you some time. If you want to keep your home after filing for bankruptcy, you have the option of filing a reaffirmation agreement with the bankruptcy court. This document is your declaration that you agree to the outstanding mortgage and will continue making mortgage payments to the lender, despite your bankruptcy filing. To reaffirm your mortgage, you must be current on your mortgage payments.
Your Homestead Exemption
Most states allow homeowners to protect a certain amount of equity in their homes from creditors. If the appraised value of your property is less than your mortgage balance, or if your equity falls within the homeowner exemption, the bankruptcy trustee will likely allow you to keep your home because there's no equity in the property to pay your debts. If, however, you have equity in the property that exceeds the allowable homestead exemption for your state, it is probable that the bankruptcy trustee will sell your property to satisfy your debts. As a first step, you must identify the homeowner exemption for your state by contacting a bankruptcy attorney. Then, you must determine if your equity in the property falls within the homestead exemption.
Security Interests Survive Bankruptcy
The lender's security interest in your mortgage survives a Chapter 7 bankruptcy. If your property is actually included in the bankruptcy filing, the bankruptcy discharge will relieve you of further personal liability for the mortgage. Ownership of the property will revert to the lender. It's important to draw a distinction, however, between relieve and forgive. Because bankruptcy relieves rather than forgives, your credit rating will be adversely affected by any bankruptcy filing.
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