You invested a lot of time and effort in choosing your home and then making it your own. That’s why it’s so difficult to imagine not being able to live there because you have to declare bankruptcy.
But petitioning for bankruptcy doesn’t mean you’ll lose your home, especially if you file for Chapter 13 – the key is proving you are able to maintain your repayments for the entire duration of the repayment schedule.
Here’s what you need to know to keep your home if you’re filing for bankruptcy.
Contest the Foreclosure
Banks and other lenders make mistakes all the time, so you are well within your legal rights to contest the validity of their decision to foreclose on your home. Now, filing for Chapter 13 puts an automatic stay on creditors, including whoever you pay your mortgage to. But if you can prove that your lender has made any errors in the management of your mortgage account, that can be enough for the chancery court to completely dismiss the foreclosure.
Convert Mortgages To Unsecured Debts
Most homeowners are not just struggling with a first mortgage, but second and third mortgages they also took out against their property.
This is a far more regular occurrence than people think, and servicing these additional mortgages is a key reason many homeowners eventually have to file for Chapter 13 bankruptcy – they simply can’t afford the multiple payments.
The good news is that under a Chapter 13 filing you can possibly strip off those additional mortgages on the basis that they\’re no longer secured debts i.e. you owe more on your home than its current market value.
If you can successfully have these additional mortgages converted to unsecured debts, then you\’ll only have to repay a fraction of that debt.
Be Honest About Your Debts
It is absolutely critical that you provide a bankruptcy court with a full and honest disclosure of your debts. The issue is that many spouses hide the extent of their debt burden from their partner so as not to worry them.
They then attempt to do the same thing during their bankruptcy petition, but even with the noblest of intentions, that person is committing bankruptcy fraud.
Remember that the courts will do their due diligence in tracking down all your creditors, whether they\’re under your real name or any type of assumed or hidden identity.
Eliminate Other Debts
Filing for bankruptcy means you’ve spent several years mismanaging your finances in a very real way. So you no doubt owe large amounts of money to a handful of creditors.
But you probably have other outstanding debts such as store cards, additional credit cards, payday loans, etc.
These are all unsecured debts which can impact your ability to meet your ongoing mortgage payments, plus any arrears due.
Ideally you should pour every cent of your disposable income into eliminating any high-interest unsecured debts like the above. Start with the smallest debt first, paying it down with any extra cash you can raise. Then repeat that process with the next largest debt, which you can repay more quickly with the money saved by clearing the previous debt.
Cram Down Secured Debt
Bankruptcy judges do have the power to ask creditors to reduce certain secured debts to match their current market value and at a lower interest rate, or what is known as a “cramdown”
Let’s say you purchased a motorcycle for $20,000 with a monthly payment of $400 over 5 years. The total value of your purchase agreement is $30,000, to include interest due over the full repayment term.
You then file for bankruptcy 3 years later but you still owe $20,000 of the total $30,000 on the motorcycle – you’ve effectively only paid off the interest on your loan.
So you are still paying $400 per month for the motorcycle even though the current value of the motorcycle is now $14,000.
You can ask the court to cram down the loan to the current market value of $14,000 and reduce the interest charged on that loan to current market levels.
Choose The Lowest Repayments Possible
When faced with Chapter 13 bankruptcy most people want to repay their debts as quickly as possible and get on with their lives. This is the reason why a 3-year repayment plan is so popular.
But you might be doing yourself a disservice here, and potentially putting your home at risk by trying to achieve too much too soon.
The very last thing you want to have happen is to miss a mortgage payment at any stage during your repayment plan – that can instantly put your home at risk of foreclosure.
That’s why choosing the lowest (most affordable) payment schedule possible makes far more sense. This will ensure that you won’t miss a repayment for any reason.
However, the very first step you should take in this process is seeking professional legal counsel on what bankruptcy filing options are available to you.