How bankruptcy affects mortgage lending

October 18, 2018

Consequently, before you file for bankruptcy, you should first understand the possible risks and benefits that may arise and how the process can affect your mortgage lending. The following are some of the ways on how bankruptcy affects mortgage lending:


Considering your mortgage before you file for bankruptcy


I. Bankruptcy can help prevent foreclosure.

Debts can delay the payments of mortgage lendings, and this can prompt the lenders to commence proceedings of foreclosure. In this case of mortgage lending, the lender is allowed to seize the debtor’s property to repay the debt.

However, pronouncing bankruptcy can stop the foreclosure because the court can impose an automatic halt on all creditors.

II. Bankruptcy can lead to legal action by the mortgage lending entities.

Pronouncing bankruptcy forces the lender of the particular mortgage to stop any legal actions against the debtor. Subsequently, the lenders have to wait for the court to evaluate the condition and make a decision. This prevents the creditors from initiating legal actions during bankruptcy.

III. Bankruptcy allows one to reaffirm the debt of mortgage.

The court may grant the option to reaffirm mortgage debt and agree not to include the mortgage in the proceedings of bankruptcy. By reaffirmation, one reaches an agreement with the mortgage lending facility to continue making payments on the home loan.

IV. Bankruptcy can lead to a balance deficiency.

Declaration of bankruptcy can save you from a deficiency balance. If you have mortgage debt, you have an option to leave behind the mortgage loan to the mortgage lending institution. Therefore, if the home value drops by the time you walk away, the lender may not be able to recover the mortgage lending balance of the house in full.

In many cases, the mortgage lenders choose to pursue a debtor for the balance of the mortgage. If you declare bankruptcy and gladly allow the lender to foreclose the loan on the mortgage, any outstanding deficiency can be discharged through the bankruptcy.

V. The type of bankruptcy you file will affect your mortgage differently.

The type of bankruptcy you chose can affect the liability of the mortgage. By opting for chapter 13 bankruptcy, your obligation to a lease remains in the right, but there is an option to repay the payments that are overdue by use of a payment plan.

  • However, in chapter 7 bankruptcy will usually discharge your outstanding debts.
  • According to chapter 7, the home secures your mortgage lending. Therefore, the debt to the mortgage lender cannot be fulfilled. This is because the household remains in the debtor’s possession.

It is possible that you can keep your home even after declaring bankruptcy by chapter 7. However, in some instances, the court can decide that the debt can be handled more efficiently through the sale of the property. In such cases, the court repays the mortgage lender and uses any of the remaining alternatives from the deal to try to pay the lending facility its debt.

Bankruptcy can affect the mortgage of a home in many different ways. It depends on which type of bankruptcy you file.