The Effects of Bankruptcy on Mortgages and Foreclosures

Bankruptcy, Foreclosure, Mortgage

Filing for bankruptcy has a significant impact on all aspects of your finances- including your homeownership. But if you can commit to a reorganization plan, there is a good chance you can keep your home and avoid foreclosure.

In a Chapter 7 bankruptcy, your outstanding unsecured debts are all wiped out. Chapter 7 debtors are not required to repay these liabilities. In contrast, a Chapter 13 bankruptcy is available for debtors who do not meet the income requirements of Chapter 7. In a Chapter 13 bankruptcy, debtors at higher income levels who meet the eligibility requirements can agree to repayment plans to pay some portion of their debts periodically to creditors. Chapter 13 has the advantage of allowing debtors to retain ownership of their property by making regular payments to their mortgage holders.

Chapter 13, however, does not guarantee that your home will not become subject to foreclosure. A homeowner must continue to make periodic, partial payments to the mortgage company to retain ownership of his home. These payments must continue for the duration of the Chapter 13 proceeding. The owner may be required to make payments either to the lender or the Chapter 13 trustee who then turns the funds over to the lender. In either case, you must pay back all your overdue assessments at the conclusion of the repayment period. A three to five-year cushion to repay overdue amounts is an attractive feature of Chapter 13 bankruptcy.

If your home is in foreclosure when you file for Chapter 13 bankruptcy, the automatic stay halts the foreclosure process. Chapter 13’s reorganization plan allows the owner to make payments that are overdue to the lender. So long as the owner makes timely payments to make up the deficiencies, then the lender cannot foreclose on the property.

Some owners may also be able to wipe out existing second mortgages or home equity lines of credit in a Chapter 13 bankruptcy. This is referred to as “lien stripping.” To remove these liabilities, the second mortgage or home equity loan must no longer be secured by the equity in the home as a result of significant deterioration in the home’s value. A professional appraisal can determine whether there would be funds to pay a second mortgage holder once the first mortgage is satisfied.

The experienced team of attorneys at the Law Offices of Mark Weinstein, P.C. can help you litigate your real estate claims. Contact Mark Weinstein and his colleagues at (770) 888-7707 or visit them at to find out how they can advise you.

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