Helping With Your Financial Future

How bankruptcy affects your mortgage in California

On Behalf of | Sep 16, 2023 | Chapter 7 Bankruptcy

Sometimes, people get so buried in debt that they may see no other way out other than declaring bankruptcy. This may be the case for people who have fallen behind on their mortgage payments. They may believe Chapter 7 bankruptcy will be the only option to save their home.

How Chapter 7 bankruptcy will change a mortgage

If a homeowner does manage to obtain a Chapter 7 bankruptcy, the mortgage will be affected in a specific way. Certain unsecured debts you may have will indeed be eliminated. However, you must consider that the mortgage lender likely has a lien on your home. If the debt is unpaid, the lender can repossess it. While the loan may be eliminated by Chapter 7, the lien will not be. While you will not have to pay the mortgage, you won’t have your home either.

Overall, Chapter 7 is not a magic bullet for the problem of mortgage payments. Chapter 7 is probably a better idea for homeowners who want to eliminate other debts so they can focus on paying off their mortgage.

Who is approved for Chapter 7 bankruptcy

Another challenge is that not everyone approved for bankruptcy can use Chapter 7 bankruptcy. Instead, many will be forced through a Chapter 13 process if they don’t pass an income means test. Chapter 13 bankruptcy differs from Chapter 7 in the following ways:

  • Chapter 13 is a reorganization of debts into a new payment plan
  • Requires monthly payments
  • Your home and other assets will be protected from liquidation or foreclosure

Many people don’t wish to go through Chapter 13 since it means still paying back debts in a reorganized manner. However, it also means still keeping your house. If that is important to you, Chapter 7 may not be the right choice.