Many people are concerned how their mortgage loan is affected if forced into a bankruptcy and when someone experiences financial crisis like job loss, medical crisis or business failure, it can become quite difficult for them to repay all of their existing loans or debts. Filing bankruptcy may seem to be a viable option in order to get rid of these debts, but you should know it may become difficult to qualify for a new mortgage. At least right away. You should also know that your existing mortgage gets affected when you file bankruptcy.
What happens to your existing mortgage after bankruptcy filing?
When you need to declare bankruptcy, you usually will want to file either chapter 7 or chapter 13. However, the consequences of filing chapter 7 are different from that of chapter 13. The effects on your existing mortgage after filing bankruptcy are discussed below.
Consequences of filing Chapter 7:
Sometimes filing chapter 13 can be really expensive for the homeowners. In that case, filing chapter 7 bankruptcy is favorable for them. It can free you from your personal liabilities to pay back the existing debts. However, homeowners may still be unable to keep their house after the discharge of bankruptcy depending on your state laws. In addition there are earnings and asset guidelines that must be met to qualify.
Consequences of filing Chapter 13:
You can protect your home from a foreclosure by filing chapter 13 bankruptcy; however, it is advisable that you seek help from an experienced bankruptcy lawyer. By filing chapter 13, you can work on a structured debt repayment plan, which can also take care of your monthly expenses. Usually, you need to repay your court trustee within 3-5 years. Chapter 13 can also give you automatic stay protection, which can prevent your creditors from suing you. It is also helpful to stop collection efforts during the repayment process.
Reaffirming mortgage debt:
If you want to save your home even after filing chapter 7 bankruptcy, then you need to file a reaffirmation agreement. Once you file the paperwork, the mortgage company may agree to work with you and also approve your plan so that you can clear the delinquent account within a specific time period. It means that you are agreeing to pay off the debt amount, which you owe to your lenders.
Paying for deficiency after foreclosure:
If your bank forecloses your property but cannot recover the unpaid debt, then you might have to pay for the deficiency. If you are unsure if you can maintain your property and it’s debt service, then you should seriously consider when you are filing bankruptcy as the time to legally turn the property over and have the debt dissolved.
How do you qualify for a new mortgage after bankruptcy?
Go through the following steps to know how you can qualify for a mortgage even after filing bankruptcy.
1. Plan a budget and follow it – Analyze your financial status and prepare a budget. Try to follow it in order to save yourself from any more debt problems in the future.
2. Try to rebuild your credit – If you have any debts that exist after the bankruptcy discharge make sure to pay them on time. Check out using secured lines of credit or unsecured lines that you can aquire. Even if you have a higher interest rate for a short time it will help rebuild your credit so that you can apply for a new mortgage loan within 2 years of time or so.
3. Get professional help if you’re not familiar with the credit laws to clean up the mistakes within your credit report. It’s estimated that as much as 79% of all credit reports have mistakes and negative items reported. If not reported correctly then credit repair may make sense and those bad credit marks must be deleted per the Fair Credit Reporting Act.
4. Check your credit reports regularly – It is really important to check your credit reports regularly. If there are errors, then fix them immediately.
5. Get ready for making a down payment – You may not qualify for a minimal down payment mortgage. Therefore, you may need to make a sizable down payment in order to qualify for the mortgage.
6. apply for FHA or VA mortgage loans – It is relatively easier to qualify for an FHA or a VA mortgage loan than that of conventional mortgage loans.
It is quite important to learn from your past mistakes, if possible. Therefore, you should not make any more late payments or leave medical bills unattended to. When you are taking out any loan/debt, you should carefully analyze your financial situation in order to ensure that you’ll be able to make the required monthly payments on time as you’ve determined in your budget as determined in the first step above.
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I was under the impression that second mortgages were just being wiped out these days, and that deficiency judgments weren’t easily enforced. Great blog!
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Many of our clients file for bankruptcy, but they have no intention of keeping the home. In many instances the mortgage is 2 – 2.5 times the current value of the home. This is a sad reality of the current housing values.