Home mortgages are some of the most significant forms of debt for many consumers. A mortgage is an investment, and the longer a person makes payments, the more equity they will own in their home. Because of this, many homeowners will worry about what will happen to this equity if they get behind on mortgage payments. In some cases, homeowners may have taken out second or third mortgages in order to complete home repairs or pay other costs. For those who are struggling to pay what is owed while also addressing other types of debts and covering their regular expenses, bankruptcy may seem like a good option. However, when filing for bankruptcy, a homeowner will want to understand the best approach to take and determine whether they will be able to maintain ownership of their home.

Addressing Mortgage Debt Through Bankruptcy

The options available to a homeowner will depend on the value of their home, the amount remaining on their primary mortgage and any junior mortgages, and whether they have defaulted on mortgage payments. If a homeowner has remained current on their mortgage payments or is able to catch up on any missed payments, they may be able to complete a Chapter 7 bankruptcy. This will allow them to discharge other types of debts, such as credit debts or medical debts. Texas law provides an unlimited homestead exemption, so a homeowner will be able to maintain ownership of the equity in their home while receiving a fresh financial start.

If a homeowner has gotten behind on mortgage payments, Chapter 13 bankruptcy may be a better option that will allow them to avoid foreclosure. In these cases, the amounts that are past due, including missed payments, late fees, or other penalties, will be included in their Chapter 13 repayment plan. Once the plan has been completed, the homeowner will be current on their mortgage, as long as they have continued to make all monthly mortgage payments. Other debts that were included in the repayment plan will be discharged once the plan is completed, providing the homeowner with some financial relief that will allow them to meet their ongoing needs going forward.

Mortgage delinquencies skyrocketed in April. One big reason: the pandemic CARES Act provided for extraordinary mortgage payment forbearance.

Epic Increase in Mortgage Delinquencies

The number of home mortgages that became delinquent in April was largest one-month increase in U.S. history. 1.6 million mortgages current in March were not paid in April, according to Black Knight, a mortgage data provider.

Chapter 13 gives you valuable power to force your mortgage lender to be up front about how much you owe, and to efficiently dispute the amount.

Catching Up on Your Mortgage over Time

A Chapter 13 case gives you the power to catch up on your home mortgage(s) over an extended period. This “adjustment of debts” type of bankruptcy can give you up to 5 years to catch up.

Summary

Do you have a second or third mortgage on your home? Imagine if you could stop paying that monthly mortgage payment. Imagine over the course of the next 3 to 5 years paying only as much as you could readily afford to pay on the balance of that mortgage. This is often only a small portion of the mortgage balance. Or, if over that time you could afford to pay nothing, you’d likely pay nothing on that mortgage balance. Then at the end of that time, whatever you couldn’t pay would get completely written off. That’s what happens in a second or third mortgage strip under Chapter 13 “adjustment of debts.”

Qualifying to Strip Your Second or Third Mortgage

The economic environment that is most likely to result in stripping mortgages is one of declining or static home prices. That’s not currently the situation in most parts of the country. Yet, given the huge potential advantages, it’s still worth looking to see if you qualify.

Chapter 7 provides no mechanism to cure your mortgage. But Chapter 13 does provide a powerful, realistic, and practical way to do so.

Chapter 7 “Straight Bankruptcy” and Chapter 13 “Adjustment of Debts”

Chapter 7 and Chapter 13 are the two main consumer bankruptcy options.