How bankruptcy may help with mortgage default

On Behalf of | May 21, 2021 | blog |

Bankruptcy is a legal process that discharges certain debts, and the debtor no longer owes it. Homeowners in East Orange, New Jersey, with delinquent mortgages may have bankruptcy as an option to relieve them of debt.

Defaulting on mortgages

Some lenders may accelerate the debt or demand that the owner pay the remaining balance, but they usually give notice. If the homeowner skips a payment, the lender sometimes adds interest charges. If the borrower keeps falling behind on payments, the lender may foreclose on the home. This reverts control of the property back to them, and the owner must leave.

In many cases, the lender must give the owner a minimum of 120 days before starting the process, and lenders must follow state laws. The lender could also pursue a delinquency judgment on the homeowner to collect the balance after the home sells.

Bankruptcy and defaulted mortgages

The way a mortgage default is handled in bankruptcy depends on the type of bankruptcy the consumer files. Chapter 7 liquidates nonexempt assets, such as valuable artwork or antiques, and the trustee sells them to pay creditors.

Debtors may keep properties that don’t have enough equity in the nonexempt property to pay creditors. They are allowed state or federal exemptions up to a certain amount, but they can’t claim both. For example, they may keep their primary home as long as they stay current on payments.

Chapter 13 allows a debtor to repay the mortgage through a court-approved structured payment devised by the debtor. Debtors commonly have three to five years to complete the payment plan, or the debts may get renewed. Debtors are allowed to keep property, but they must have sufficient income to qualify for Chapter 13.

Bankruptcy gives struggling homeowners a fighting chance to keep their home. However, it must be done correctly, so they should seek legal assistance.