You may have serious financial problems but have still managed to keep current on your mortgage. How does bankruptcy NOT hurt your home but instead protects it?
If you are current on your mortgage (or mortgages) in spite of being behind on other debts, it’s likely because your home is very important to you. If you intend to keep your home, you’ll be happy to hear that the bankruptcy system supports that decision in many ways.
Bankruptcy helps you keep your home in three broad ways:
1. By protecting your home equity and ownership.
2. By preserving your relationship with your mortgage holder.
3. By enabling you to concentrate on paying for your home-related obligations by writing off or managing your other debts.
Protect Your Present and Future Home Equity and Ownership
With the devaluation of homes throughout the country during the last 4, 5 years, many homeowners have no equity or have much less than they used to. If you do have some equity, it’s highly likely that it is protected by the homestead exemption. That’s the first thing that I would determine with you if you came to see me for a consultation.
When deciding whether to keep your home, understandably you think about whether it’s a smart move for the present, but it’s wise also to look towards the future. Just as the decision to keep a house is both a financial and personal one, consider the future aspects of that decision both financially and personally.
On the financial side, no one knows what the housing market will do in any particular region or neighborhood in the near term, much less the long term. For many reasons, residential rental costs are rising rapidly in many areas of the country, and home values are expected to follow eventually. Assuming that your home will increase in equity at some point, filing bankruptcy now will protect that equity from your present creditors forever.
Beyond the strictly financial issues, you undoubtedly have deeply personal ones that legitimately affect your decision. You have the right to use the legal system in a fair way to serve your personal values. It is understandable that your home is important to you because you have children in the local school district, because your neighborhood is the core of your social community, because you want your adult children and grandchildren to have a comfortable place to come visit you, because keeping your home will help hold together your marriage and your family, and even because you know that holding onto that critical piece of stability is important for your self-esteem and mental health. Bankruptcy is often an appropriate and effective way to preserve these values in your life.
Keep Your Mortgage Holder Happy
Some homeowners who have moved mountains to keep current on their mortgage and to preserve their mortgage credit history are concerned whether bankruptcy will hurt that important relationship. Simply said, if you are current on your mortgage and intend to continue being, for all practical purposes filing bankruptcy will have no effect on that relationship.
If you file a Chapter 7 “straight bankruptcy,” you will continue making mortgage payments as normal. Your mortgage holder will get a standard notice about your case, but at about the same time will receive a formal notice that you intend to continue making the payments. We will discuss with you whether you should go through the formality of “reaffirming” the mortgage debt, but that is personal conversation beyond the scope of this blog.
If you file a Chapter 13 “payment plan,” you will very likely continue making the mortgage payments directly to your mortgage holder, instead of through the Chapter 13 trustee, to whom you pay your monthly “plan” payment for other creditors. (That may be done different in some jurisdictions, but in any event you will be making your full mortgage payment.) Your mortgage holder will receive a standard notice about your Chapter 13 case, but at about the same time will receive a copy of your “plan” showing that it will continue being paid directly. As long as you pay your mortgage on time, and fulfill any other contractual obligations to the mortgage holder, such as keeping current on your property taxes and insurance, your relationship with the mortgage holder will continue as normal.
Concentrate on Paying for Your Home
Bankruptcy will take away other financial pressures so that you can focus your financial and emotional energies on what is most important to you—your mortgage and other home-related obligations. You will be relieved of these other financial pressures potentially in two ways: by the write-off (discharge) of debts, and/or by the restructuring of other debts. The details depend on the nature of your debts, the other specific facts of your case, and the choices we will help you will make. But the key point is that you will much more easily make your mortgage payments, and so keeping your home will become much more realistic.