Debtors in Livonia, Michigan, commonly file for one of two types of bankruptcy when they see no way to repay their debt. Chapter 7 helps a debtor get certain debts discharged by selling nonexempt assets. Chapter 13 restructures debts for individuals with steady wages to repay creditors gradually. However, debtors may wonder how mortgages get handled in bankruptcy.
Mortgage in bankruptcy
Debt is divided into two groups on bankruptcy petitions: priority and non-priority, which further splits into exempt and nonexempt. Priority debts commonly have collateral attached or need to get paid first, and they rarely get discharged. Mortgages are considered nonexempt priority debt under bankruptcy law since homes act as collateral.
Mortgage debts will get paid first using proceeds from sales under Chapter 7. Even if a debtor has no obligation to pay the mortgage, the home still has a lien on it. This means the lender can still repossess property for nonpayment. Under Chapter 13, a debtor can keep a property as long as he or she makes timely current payments and catches up on missed payments.
Chapter 7 exemptions
Some debtors may have the option to save their homes with state or federal bankruptcy exemptions. This bankruptcy law allows a debtor to exempt a certain amount of equity, or home value minus the mortgage. If a home has little equity left, the trustee may not be inclined to sell it.
Homeowners can deduct equity up to $40,475 under the Michigan homestead exemption, and this happens without filing a declaration. Federal exemptions allow a $25,150 deduction, but homeowners cannot use both. Michigan commonly makes adjustments to the amount every three years, which changes again in 2023.
Bankruptcy doesn’t have to mean giving up one’s property, and the automatic stay halts the process. This means creditors cannot sue or seek further payment from debtors, at least temporarily. It gives debtors a chance to save their homes and consult an attorney.
