Millions of homeowners throughout the United States are struggling with crushing debt. Many have underwater mortgages, meaning they owe more than their homes are worth. Others are overwhelmed with credit card debt, medical debt, student loans, and other enormous financial obligations.
If this describes your situation, bankruptcy might be the right move for you. But how might it affect your status as a homeowner? Take a look at the answers to these 10 FAQs about bankruptcy and foreclosure—then contact our firm for a more personalized assessment.
1. Does bankruptcy stop foreclosure?
Because of the automatic stay, bankruptcy both prevents foreclosure and halts existing proceedings. But the automatic stay only lasts for the duration of your case, so your deficiencies must be resolved at the end of your bankruptcy if you want to keep your home after filing. Generally, Chapter 7 delays foreclosure by several months, while Chapter 13 may help you permanently eliminate the threat.
2. Will I lose my home if I file bankruptcy?
This depends on your situation. Bankruptcy may directly cause you to lose your home if you file Chapter 7 and cannot protect your home from the liquidation process. This protection is called exemption, and the assets and levels of equity you can exempt from Chapter 7 liquidation vary from state to state. In Florida, for example, homeowners can protect all equity in their homestead if they have owned it for at least 3 ½ years.
If you file Chapter 13, on the other hand, you won’t need to worry about liquidation. You will have 3-5 years to catch up on delinquent payments (and continue making regular payments), and, if you succeed, the threat of foreclosure from your lender will be gone by the end of your case. In addition to delinquent payments and regular mortgage payments, however, you will need to pay the value of your nonexempt equity over the course of your repayment plan.
Therefore, the only way to lose your home by filing bankruptcy is if you cannot protect it from Chapter 7 liquidation, or you file Chapter 13 but do not complete your repayment plan.
3. What type of bankruptcy is best for underwater homeowners?
This is a difficult question to answer because every homeowner’s situation is different. However, Chapter 13 is generally the right path for homeowners who want to file bankruptcy and owe more on their home than the home is worth. This is because Chapter 13 gives you several years to catch up on delinquent payments. Some homeowners even use this time to negotiate with their lenders to obtain a mortgage modification that is more reasonable for their situation.
4. Can I exempt my home or equity in Florida?
Yes. Although exemptions are important for both Chapter 7 and Chapter 13, they function differently in each situation. In Chapter 7, the homestead exemption amount depends on how long you have owned the home.
In Chapter 13, you do not need to exempt all your equity in order to protect your home. Depending on how long you have owned your homestead will determine the amount of equity which is exempted. However, any equity that you cannot exempt will need to be repaid over the course of your plan. This is because creditors in Chapter 13 must receive as much as (or more than) they would receive through Chapter 7 liquidation.
5. Can bankruptcy wipe out my mortgage debt?
Bankruptcy may eliminate your liability for mortgage debt, meaning you are no longer legally obligated to pay it. However, mortgages are a form of secured debt, meaning the lender has the contractual right to seize the collateral (i.e. your home) through foreclosure if you fall behind on payments. So, while your mortgage debt may be included in a bankruptcy discharge, you might still lose your home after your case if you have not resolved delinquencies and come to an agreement with your lender.
In limited cases, you may benefit from lien-stripping (see below).
6. What is lien-stripping?
Before discussing lien-stripping, let’s first define a lien.
A lien is a creditor’s legal claim to your property. When you sign a mortgage or automobile loan agreement, you are voluntarily agreeing to a lien because the contract gives the lender the right to seize your property (i.e. your home or vehicle) if you default. In other cases, the lien may be involuntary, meaning another creditor places a lien on your property because of unpaid debt. The IRS can place a lien on your property relatively quickly, while a private lender (like a credit card company) will need to obtain a judgment against you in court.
Lien-stripping, therefore, is when a court removes the lien from your property. In other words, the court converts debt from secured to unsecured. When you receive a debt discharge, this debt can be wiped away, and the creditor that was previously a lienholder can no longer seize your property.
This brings us to Chapter 13 bankruptcy, which occasionally results in a lien-stripping of a homeowner’s second and/or third mortgage (NOT the first mortgage). To qualify for a second mortgage lien-stripping, you must owe more on your first mortgage than your home is worth. To qualify for a third mortgage lien-stripping, you must owe more on your first AND second mortgages than your home is worth. To strip the lien off both your second and third mortgages, you must owe more on your first mortgage alone than your home is worth.
Once the lien is stripped from one or more mortgages, the creditors that held the liens no longer have a right to your equity or the proceeds from the sale.
7. What is a cramdown? Can the bankruptcy court cramdown my mortgage?
A cramdown is when the court reduces your loan to what the property is worth (i.e. the property’s fair market value). Unfortunately, this is only an option for rental properties, vehicle loans and other small, secured loans (e.g. furniture) in Chapter 13 bankruptcy. The court will not be able to cramdown your mortgage on your primary residence. If a cramdown is achieved, the secured amount still owed after the cramdown must be paid before your Chapter 13 bankruptcy is completed.
8. What about business bankruptcy for homeowners?
If you file Chapter 11 for your business, you may be able to modify the mortgage on your principal residence. This is only an option if you are a small business owner and qualify for Subchapter V. Additionally, you must have taken out the mortgage primarily to fund your business—not to finance your home.
9. Is bankruptcy the only way to stop foreclosure?
No. You may have several options at your disposal, including:
10. What is the best way to keep my home if I have too much debt?
This is impossible to answer without a comprehensive assessment of your situation. Some homeowners will greatly benefit from bankruptcy, while others will benefit more from a bankruptcy alternative. The best way to determine which debt-relief strategy is right for you is to retain counsel from an experienced attorney.
Discuss All Your Options with Our Legal Team
Looking for strategic counsel and personalized recommendations? Come to Buchalter & Pelphrey Attorneys At Law. We have decades of experience helping homeowners who are struggling with insurmountable levels of debt, and we want to use this experience to help you and your loved ones. You can trust us to provide the insights and dedicated advocacy you need to overcome this challenging situation.