Can A Mortgage Be Included In A Chapter 7 Bankruptcy Case?

A mortgage can be included in a Chapter 7 bankruptcy, but it’s important to understand what that means for your home and your mortgage debt.

Discharging Mortgage Debt

In Chapter 7 bankruptcy, you can discharge (eliminate) your personal liability on the mortgage loan. This means you’re no longer legally obligated to repay the loan. However, the lender still has a lien on your property, which is the right to take back the property if you don’t make your payments.

Options Regarding Your Home

When you include your mortgage in a Chapter 7 bankruptcy, you typically have a few options:

1. Surrender the Property: You can choose to surrender the home to the lender. This means you walk away from the home, and the lender takes it back. The mortgage debt is discharged, so the lender can’t come after you for any deficiency (the difference between what you owe and what the home sells for at foreclosure).
2. Reaffirm the Debt: You might have the option to reaffirm the mortgage debt. This is a legal agreement that excludes the mortgage from the bankruptcy discharge. You continue making payments to keep the home, and you remain personally liable for the debt. This means if you default on the mortgage in the future, the lender can pursue you for any deficiency.
3. Retain and Pay: Sometimes called “ride-through,” this informal option involves continuing to make mortgage payments without formally reaffirming the debt. You keep the property as long as you stay current on payments. However, because the debt is discharged, the lender can’t pursue you for any deficiency if you later default, but they can still foreclose on the property. Not all jurisdictions allow this option, and lender policies vary.

Impact on Credit and Future Homeownership

• Credit Report: The bankruptcy will appear on your credit report for up to 10 years, and the discharged mortgage will be noted as included in bankruptcy. This can impact your credit score and your ability to get new credit, including a new mortgage.
• Future Homeownership: After a Chapter 7 discharge, you’ll typically need to wait a certain period before you can qualify for a new mortgage. This waiting period varies depending on the type of loan (e.g., FHA, VA, conventional) and can range from 2 to 4 years or more.

Important Considerations

• Legal Advice: It’s crucial to get legal advice tailored to your situation. Bankruptcy laws are complex, and decisions regarding your home and mortgage should be made with a clear understanding of the consequences.
• State Laws: The specifics can also vary based on state laws, particularly regarding exemptions that protect your home equity in bankruptcy and the rights of mortgage lenders.

In summary, while you can include your mortgage in a Chapter 7 bankruptcy and discharge your personal liability, the lender’s lien on your property remains. Your decision to surrender the home, reaffirm the debt, or try to retain the home while discharging the debt should be made with careful consideration of your financial situation and future goals.