Most individuals who file bankruptcy and want to keep their home are able to do so. There are three ways that the law assists Debtors in keeping their homes. One of those is the homestead exemption, which protects the equity in the Debtors homestead from creditors. The second is the ability to continue with payments to a mortgage that is current, catch up on payments that are behind or attempt a mortgage modification. The third is the ability to strip a junior mortgage where there is no equity to protect the mortgage.
Homestead Exemption
The homestead exemption is very valuable for Debtors who have either paid the mortgage on their homes in full or until they have equity in their property. The homestead exemption protects the equity from the claims of almost all creditors. Liens must be consensual such as mortgages or for liens against the home for work done on the home.
Regular judgment creditors do not obtain a lien against a debtors home when they obtain and record a jugment, even though they obtain a lien against real estate that it is in the debtors name and not homestead property. If you have a judgment entered against you before the filing of a bankruptcy case, then debtors may obtain a determination, as a part of the bankruptcy case that the lien does not attach. There are also means to obtain such a determination outside of bankruptcy court. This allows debtors to avoid paying the liens at the time of closing. Certain liens can still attach.
Secured Creditor Limits
When a bankruptcy case is filed and a debtor is current with mortgage payments and willing to sign an agreement to continue being responsible for the debt, a reaffirmation agreement, the creditor must allow the debtor to retain and pay for the home. In most instances, the Debtor can retain the home simply by continuing to make the payments if they are current when the case is filed. In a Chapter 13, a debtor has the opportunity to catch up on past-due payments over time (even if the creditor is demanding payment of the past-due amount in a lump sum).
Modification Options Remain
A debtor who files a bankruptcy case still have options to week mortgage modification. For instance, the HAMP program provides that debtors cannot be excluded from the program simply for filing bankruptcy and cannot be forced to sign a reaffirmation agreement in order to participate in the program. A bankruptcy discharge may even help a debtor qualify for a modification and/or make the payments easier for the debtor to make by eliminating other obligations so that the Debtor has more income available to make the payments on the mortgage.
Removal of Second Mortgages
If a debtor has a first mortgage where the balance exceeds the value of the home, then any additional mortgages or home equity loans can be “stripped off” or removed in a Chapter 13 case. Under recent case law, this relief also appears to be available in a Chapter 7 case. Not only does the removal of these obligations ease the income situation, they also result in the debtor being able to accumulate equity in the home more quickly, so that the decision to keep the home is more beneficial for the Debtor.