If your house is worth less than you owe on it, you are in a situation referred to as an underwater mortgage. This can be a bad situation, especially if you are struggling to get by financially and really want to avoid losing your home. One strategy that might help you get out of this situation is Chapter 7 bankruptcy. Before choosing this option, you should first discuss this with a bankruptcy attorney. Here are three things you will need to know before you make this decision.
Bankruptcy Can Help You Save Your Home
When bills pile up and money is scarce, you might end up falling behind on your mortgage payments. This may cause your lender to file foreclosure documents on your home, which can be a scary event. You can stop the foreclosure by filing bankruptcy, though. Chapter 7 bankruptcy and Chapter 13 can both be helpful for stopping a foreclosure, but Chapter 7 is the preferred option.
If you qualify for Chapter 7, you might be able to eliminate other debts you have and keep your home. With Chapter 13, you can keep your home; however, you will have to repay some of the other debts you have.
As soon as you file either type, the trustee will issue an automatic stay. This is something that stops all collections from occurring, including foreclosure proceedings.
It Will Require A Reaffirmation Agreement
The only way a trustee will let you keep your house when filing Chapter 7 is if there is no equity in it. Because your loan is underwater, keeping your house will not be a problem; however, you will have to convince your lender to reaffirm the loan. Any secured asset you keep in Chapter 7 will require a reaffirmation agreement, and it is up to the lender to decide if they will agree to it.
A reaffirmation agreement is used to keep a specific financial arrangement the same. For a house loan, the agreement would state that you will continue making your scheduled payments in exchange for getting to keep your home.
The downside to this agreement is that you might have to come up with the past-due amount you owe before the lender will agree to sign it.
You Could Ask For A Loan Modification First
When you owe more on your house than it is worth, it might seem pointless to you to sign an agreement to repay the full balance on the home. If you want to keep the house, this might be your only option, though, unless you can convince the lender to modify your loan.
A loan modification is something used to help homeowners keep their homes during financial hardships. If you are filing bankruptcy, it is probably because you are having a financial hardship, and this might be one of the factors the lender looks at.
With a home modification, the lender will agree to change terms of the loan to help you keep your house. This can include:
- Lowering your interest rate on the loan
- Extending the length of the loan
- Adding in past-due balances to the total loan
- Reducing the principle loan balance
Your lender might be willing to do this because it is easier to allow you to keep the home than to have to go through the foreclosure process. In addition, if you are filing Chapter 7, you might be getting rid of a lot of other bills you had been paying. Because of this, you may have more money to use to repay the loan, which means you might be less likely to default.
If the lender agrees to this, you can get the loan modification paperwork done first, and then you can sign the reaffirmation agreement.
Using Chapter 7 bankruptcy can help you save your house and regain control of your finances. If you would like to find out more about this, contact a lawyer that specializes in bankruptcy law.
