Keeping a House in Chapter 7 Bankruptcy
So you want to keep your home and file Chapter 7 bankruptcy. In a Chapter 7 Bankruptcy the debt that you owe to the mortgage company will be discharged, however the mortgage lien will remain on your home.
So here is what happens :
(A) You have received a discharge in bankruptcy;
(B) You did not reaffirm the mortgage;
(C) You still have the property; and
(D) You have continued to make payments according to the terms of the original loan.
In a nutshell :
This scenario is very common, and it gives you the best of both worlds. The underlying debt has been discharged, but the creditor still has a lien on the collateral. As long as you continue to make the payments they can’t bother you or the collateral. If you ever default, then they can foreclose, but they can never claim that you owe them any money. That would be a violation of the bankruptcy discharge.
In a little more detail :
When you took out this loan you signed papers which gave the creditor two different rights:
- to collect money from you(This was the note you signed); and
- to take the property away from you if you failed to make the payments or if you otherwise defaulted on the terms of the loan (This was the mortgage you signed.)
The bankruptcy discharge eliminates their right to demand money from you (The Note), but in most cases it does not affect the lien that they have on your property (The Mortgage) This creates the interesting situation described above, where for most purposes the mortgage remains in effect, but you now have the absolute right to walk away at anytime if that turns out to be the right thing for you.
This is especially true if you have always been current on the payments for this particular loan. They are not allowed to foreclose unless you are in default, and despite what your contract might say, the law does not consider bankruptcy to be a default for these purposes.
The bottom line : If you want to keep the property, just keep making the payments and be sure to comply with any other contractual terms, such as paying local property taxes and maintaining valid insurance. If you eventually pay off the loan you will own the property outright. If you ever decide that paying for the property is not in your best interest, whether that’s because you can’t sell it for enough to pay off the mortgage(s), or because you simply can’t afford to make the payments, or because the house burned to the ground, you can simply walk away and there’s nothing the mortgage company can say about it. They can still foreclose, but that’s all they can do.
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