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Chapter 7 and Foreclosure

What You Need To Know

 
  • Will Bankruptcy Lower My Monthly Mortgage Payment? 

    No.  Bankruptcy court cannot change your mortgage.  If your home is “underwater,” because you owe more on your mortgage than your home is worth, Bankruptcy court cannot “cram down” (reduce) your mortgage principal balance.  In some situations for certain debt, Bankruptcy court can reduce loan balances to the value of the underlying security, but not for mortgage debt on primary residences.  Neither can Bankruptcy court lower your mortgage interest rate nor lengthen the term of your loan. 

    In other words Bankruptcy court can neither reduce the amount you owe on your mortgage nor lower your monthly mortgage payments.  The only way to change your current mortgage terms is for your bank to voluntarily agree to refinance your mortgage.  Bankruptcy Court cannot force the bank to refinance your mortgage.

    If your goal is to refinance your mortgage, your best chance to do so is before you file bankruptcy.  Although some banks will refinance your mortgage after you file bankruptcy, most will not.  For these reasons, filing a chapter 7 bankruptcy as a way to save your house from foreclosure is a last resort.


  • What If I File a Chapter 7, Reaffirm My Mortgage and Discharge My Unsecured Debt?
     

    If you file a chapter 7 bankruptcy, discharge the unsecured debt and reaffirm your mortgage, at the end of the bankruptcy, you will be left with your original mortgage, but no other debt.  If you have enough income to continue making your regular monthly mortgage payments, this may work for you.  However, there are two scenarios where this may not work.

    First, if you missed too many mortgage payments before filing bankruptcy, the lender may not be willing to delay foreclosure post-bankruptcy while you catch up on the missed payments.  If you cannot quickly catch up on your mortgage payments you may end up in foreclosure despite having filed bankruptcy. 

    Secondly, if you have too much equity in your home, the bankruptcy trustee will be forced to sell it, and distribute the proceeds to pay off the mortgage, pay your bankruptcy homestead exemption and pay the remainder to your other creditors.  It is only when, after paying the mortgage and the homestead exemption, there would be no money left to pay your other creditors that the trustee would not sell your home but rather would allow you to reaffirm your mortgage.  This is much more likely to work after April 1st, 2013 when Ohio’s bankruptcy homestead exemption increased to $132,900.  See the right side-bar on the Bankruptcy page of this website for further information regarding Ohio’s bankruptcy homestead exemption increase.


  • What If I File a Chapter 7, Renegotiate My Mortgage and Discharge My Unsecured Debt?

    Your position in this scenario is that you will let the house go into foreclosure unless the mortgage company reduces your principal or interest or otherwise makes the mortgage more affordable.  Usually this is done prior to filing bankruptcy, but some homeowners have too much debt and not enough income to qualify for mortgage refinancing programs without filing bankruptcy to get rid of their non-mortgage debt. 

    In this scenario you are filing bankruptcy first without any guaranty that the mortgage company will renegotiate your mortgage after you file.  Unfortunately, most homeowners lose their home in this scenario due to the bank’s refusal to refinance the mortgage.  But if post-bankruptcy, you can afford your current mortgage payment plus the insurance and taxes, see the right side-bar discussion about reaffirming the mortgage debt.

  • What Does It Cost To File a Chapter 7?

    See The Cost of Filing Bankruptcy at the bottom of the Chapter 13 webpage. 
Should I Reaffirm?

Whether To Reaffirm Your Mortgage Is A Difficult Question

A mortgage is a secured debt, meaning that the debtor (the borrower) has pledged his house as collateral for the loan and if the debtor defaults, the creditor (the lender) has the right to seize and sell the collateral to recover his money.  After the chapter 7 is filed, if the debtor wishes to retain the collateral pledged for the loan, such as the house, then he must "reaffirm" the debt rather than discharging the debt.

A reaffirmation is a written agreement between the debtor and the creditor filed with the court where the debtor agrees to remain personally liable on the debt and pay the money owed, even though the debt would otherwise be discharged in the bankruptcy.  In return, the creditor promises that it will not repossess or take back the house so long as the debtor continues to pay the debt.  A reaffirmation agreement is a guaranty that the debtor can keep the house.

Legally, the debtor may repay any debt voluntarily, whether or not a reaffirmation agreement exists without reinstating his personal liability on the mortgage.  So what some debtors are doing is not reaffirming the mortgage loan in the chapter 7 but nevertheless continuing to make the loan payments.  By not reaffirming the debt, the debtor's personal liability on the debt is discharged, but the lender's secured interest in the house remains.  The lender can then call in the collateral at any time because the discharge of the debt is a breach of the mortgage contract. 

The issue then becomes will the lender foreclose on a home where the debtor discharged the debt but the mortgage payments, insurance and taxes are current?  In the current financial climate the answer is generally "no."  Also on the plus side, should future sickness, death or job loss make it impossible for the debtor to continue to make the mortgage payments and the house is foreclosed on and sold for less than what is owed on the mortgage, the debtor is not liable for the deficiency because that liability was discharged in bankruptcy.

On the down side, in addition to being able to foreclose whenever they want, the lender may stop reporting your mortgage payments to the credit reporting agencies because it is no longer your debt; rather, you are simply making voluntary payments.  Some debtors who want to sell their current home and buy another have difficulty qualifying for a mortgage loan because their voluntary mortgage payments do not appear on their credit report.   While the federal Fair Credit Reporting Act does give the consumer the right to correct inaccurate or incomplete information in his credit report including his mortgage payments, this added information may not affect the overall credit score.

Whether to reaffirm your mortgage debt is a complicated decision based on your individual financial situation and your comfortableness with risk.

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This website provides general legal information and not legal advice.  The law is complex and changes frequently. 
Before you apply any general legal information to a particular situation, consult an attorney. 
If you cannot afford an attorney call 1-866-Law-Ohio (1-866-529-6446) or visit OhioLegalServices.org for your closest legal aid office.

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