Avoiding Foreclosure in Bankruptcy

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How do I keep my home after filing bankruptcy. The Mortgage company wants to foreclose?

I want to know if there is anyway to keep the home even after filing chapter 7 bankruptcy. I want to know if there is any program that can assist me.

Bankruptcy does not effect your current mortgage. The only thing that will cause you to go into foreclosure is not keeping up your mortgage payments, period.

You don't have to include your mortgage in chapter 7, and it's not usually a good idea to do so if you have significant equity. Leave it out, and you even have a mechanism to restore your credit already in place, while limiting the damage the bankruptcy does. The larger the percentage of your lines of credit you include, the worse the hit is. Furthermore, if you have an open mortgage when your bankruptcy concludes, you're establishing post bankruptcy credit history, the best way to rebuild your credit. The poor folks who have to go get a new credit card get dinged even harder post bankruptcy for each turndown, so that each successive application lowers the probability their next one will be accepted. Positive feedback to a negative end. Vicious cycle.

Talk with a real lawyer in your state to be certain. I'm not a lawyer, and I don't even play one on TV. However, my understanding is that Mortgages are debt secured by a specific asset - the property. Keep up the payments on that (or bring it current if you haven't) and general creditors with unsecured debt cannot touch that asset in most states and most situations. There are exceptions, but owner occupied residential real estate is one of the most protected assets there is. The fact that it is a loan secured by a specific asset can also be used to avoid compromising the mortgage holder's interest.

The upshot is that if you make your payments on the property, and keep them current, quite often it can sail through a bankruptcy untouched. People will often let everything else go to keep making the payments on their mortgage - one of the reasons why mortgage rates are so favorable, compared to unsecured credit. Another issue I should mention is that while A paper does care about non-mortgage late payments, subprime generally doesn't. As long as you keep your mortgage payments current, you can often secure a loan on surprisingly good terms, even though it'll likely have a prepayment penalty. So keep your mortgage current if you can.

None of this is intended to encourage bankruptcy. But if you're heading for bankruptcy anyway, you want to limit the damage. The more lines of credit you can keep intact through the process, the better off you are in general. If you have six open lines of credit and only need to discharge one, that's much better for you than if you have to discharge all six. Your mortgage is the most important of these for restoring future credit and your own personal residence is protected from creditors more strongly than any other asset you may have. If you can keep that one debt current, it's usually making the best of a bad situation to do so, even if you have to let everything else go.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on December 31, 2013 7:00 AM.

Some Secrets to Good Transactions was the previous entry in this blog.

How Soon After You Purchase A Home Can You Refinance? is the next entry in this blog.

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