One of the main appeals for many consumers filing for bankruptcy is the ability to manage mortgage debts and prevent a foreclosure. While this may be possible for most filers, there are some aspects of mortgage debt to consider when pursuing bankruptcy.
Type Of Mortgage
Most people who enter bankruptcy are looking to resolve their mortgage debts on a first mortgage. In general, most mortgage debts are easily managed through a Chapter 13 bankruptcy. One exception is in the case of Adjustable Rate Mortgages, which may be subject to increase after the bankruptcy case is discharged. The bankruptcy process may also become more complicated if a debtor holds second mortgages or reverse mortgages on the home. In some instances, second or reverse mortgages may be eligible for discharge under Chapter 7 leaving only the first mortgage debt to be repaid through Chapter 13. However, this usually requires the mortgage debt to be valued more than the home is worth.
Financial Effects On Debtor
Bankruptcy laws are fairly strict when it comes to secured debt discharges and most consumers will be required to repay their debts through Chapter 13 if they wish to keep the property. This is typically the case with most mortgages. While Chapter 13 can assist debtors in repaying their debts without the threat of foreclosure, lenders may still be able to apply penalties to the debtor in the process. For example, lenders are legally allowed to apply late fees and other delinquency charges on the loan while the debtor is in Chapter 13. However, the debtor will not be responsible for repaying these penalty fees unless they fail to complete the Chapter 13 process successfully.