Thanks for submitting your question. You can accomplish different goals if you declare bankruptcy, so you need to consider all of the details of your lenders’ promissory notes and mortgages, along with your complete financial and credit position, to determine your best course of action.
This answer to your question does not consider your specific case, but covers the general issues involved in a situation like this. You may want to consult with a bankruptcy attorney to ensure your case is handled to meet your goals.
When you purchased your home you signed two pieces of paper with each lender – a promissory note and a mortgage.
- The promissory note is just that — a promise that you will repay the debt.
- The mortgage is a "lien" (or encumbrance) that provides a means for the lender to get some or all of its money back, if you do not pay on the promissory note.
When you purchased your home, you very likely made an agreement with the lender which says something like, “I agree to pay you each and every month on the promissory note and if I do not pay, then you can foreclose on my home.”
Foreclosure is the legal action of proving to a judge that you did not keep up your promise and asking permission for the court (through the local sheriff) to sell the real estate to the highest bidder at auction and “foreclose” everyone else’s interest in that real estate.
Please keep these concepts in mind as we very briefly skim the surface of bankruptcy.
There are primarily two chapters of bankruptcy that deal with consumer debts, called Chapter 7 and Chapter 13.
An individual only qualifies for a Chapter 7 if his or her income is low enough. With regard to a house with mortgages in Chapter 7, a debtor can usually do one of two things: 1) keep the home; or 2) surrender the home. If a debtor keeps the home and is current on payments, the debtor will usually “reaffirm” the debt by signing a “reaffirmation agreement.”
- The reaffirmation agreement keeps the debtor on the hook so to speak, and requires that the debtor continue to make all payments in the normal fashion as though the bankruptcy had never occurred.
- If the debtor does not sign a reaffirmation agreement then the personal requirement to continue to make payments in the “promissory note” will go away, but the lien rights under the mortgage do not go away. In other words:
- If you do not sign a reaffirmation agreement and stop paying for your home, the lender can never collect any more money from you on the promissory note as that debt has been eliminated by the bankruptcy.
- However, the lender could still foreclose on the real estate to try and get some of its money back from the sale.
So to answer your question regarding a Chapter 7 – “Presuming that you do not have significant equity in your home, you are current on your mortgages, and your income is low enough to qualify for a Chapter 7 filing, you would be able to keep your home if you would like. The law requires that we list ALL your creditors, including the first and second mortgage lenders, in the bankruptcy (whether you want to reaffirm the debt or surrender the debt).
You would need to continue making payments on both mortgages if you wanted to keep the home.”
Regarding Chapter 13 – almost any individual can file a Chapter 13 bankruptcy (with certain restrictions that your attorney should know under Section 109e). Individuals must file a Chapter 13 if their income is too high, or if they filed a Chapter 7 in the prior eight years (or a Chapter 13 in the prior 6 years).
BUT, some people file a Chapter 13 for other reasons besides the mandatory ones, including, but limited to:
- Saving a home that is in foreclosure
- Lowering payments on an auto that does not have favorable lending terms
- Paying back taxes without concern for future penalties or IRS levy
- Protecting assets from being sold in a Chapter 7
- Protecting co-debtors from law-suits
But there is another reason why someone MIGHT want to file a Chapter 13, and that is in limited circumstances we might be able to remove a second mortgage.
- In a situation where the balance owed on the first mortgage is higher than the value of the home, we can try to strip off a second mortgage. The law allows it, and the only reason that I say “try” to strip off the second mortgage is that the lender may think that the value of the home is higher than we do.
- So, if the payoff on the first mortgage is $150,000.00 and the fair market value of the home is only $100,000.00 then a Chapter 13 will allow us to strip off the second mortgage and treat it like any other unsecured creditor (like a credit card or medical bills).
In a Chapter 13 bankruptcy, the law requires that you remain in Chapter 13 for 36 to 60 months, depending on your income, but when the case is complete you will only have one mortgage on your home – and yes you get to keep the home.
So, with all that being said, while we are available to answer any of your questions via phone or email, we would suggest instead that we meet in person to go over the details of such a complex issue. Feel free to send us an email or contact our office at 317-255-9915 to schedule a free consultation at one of our three convenient locations.