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Mortgages After Bankruptcy

There is a common belief that declaring bankruptcy means you are going to lose your home. However, that is not necessarily the case.

For example, one California bankruptcy exemption allows you to keep about $22,000 worth of real estate. Of course, your home is probably worth more than $22,000, but your equity in the home (the portion of its value that exceeds what you owe) may well be less than $22,000 — and your mortgage company has first dibs on the rest. It would be pointless for the bankruptcy to force the liquidation of your home, because once the mortgage was paid off and you claimed your exemption, there would be nothing left for your creditors anyway.

Now, back to that mortgage. A mortgage is a unique kind of debt. Like most of your other debts, your mortgage may be discharged in the bankruptcy, meaning the debts are abolished and the creditors are prohibited from trying to collect them. That means your entire mortgage debt is eliminated, not just any payments you may have missed. But before you start fantasizing about a lifetime free of mortgage payments, there are some things you should know:

  • If you signed a reaffirmation agreement with your mortgage company, your debt is not discharged in the bankruptcy, and your lender may pursue collection.
  • The lender may seek reaffirmation post-bankruptcy but must clearly state that you are under no obligation to accept.
  • Reaffirmed or not, if you do not continue to make your mortgage payments, the lender can still foreclose.

Wait a minute — If the mortgage debt was discharged, why do you still have to pay it? The reason is that bankruptcy does not eliminate the security agreement between you and the lender. Under that agreement, you pledged your house if you do not pay back the loan, and that pledge can still be enforced. So, if you want to stay, you have to pay.

Bankruptcy law is complex, especially in California. Be sure you have the guidance of an experienced California bankruptcy lawyer to ensure you make the right moves.

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