For many overwhelmed debtors, bankruptcy offers a chance to move past certain debts, and to ensure that those creditors can no longer harass you. This applies to many types of unsecured debts, like credit card debts, medical bills, loans, and more. So when it comes to many people’s most important asset-their home-it is critical to understand what bankruptcy can, and can’t, do regarding mortgage debt. In other words, can you get rid of a mortgage through bankruptcy?
Mortgages are Secured Debts
Unfortunately, the answer is not a simple one as bankruptcy does not generally let debtors shed liens from secured debts. In other words, when you take out a mortgage loan, the bank places a lien on your property that “secures” the large amount of money they just loaned you. And if you fail to make timely payments on that loan, the bank can initiate foreclosure proceedings to seize that property to satisfy your debt.
So even if bankruptcy allows you to discharge your debt obligation without further payment required,, it has no legal effect on the bank’s lien on your property. Therefore, failure to timely pay your mortgage can still result in the bank foreclosing on your property based on this untouched lien. This makes sense from a public policy perspective as everyone would file for bankruptcy if it meant they could get rid of their mortgage and still hang on to their home. It is therefore critical to make your mortgage payments or to explore other mortgage alternatives to stay in your home. Even if the mortgage company forecloses, however, bankruptcy will discharge (eliminate) your personal liability for the debt.
The Federal Homestead Exemption May Protect Your Home
It is also important to understand how the homestead exemption may protect your home in bankruptcy. Chapter 7 bankruptcy involves a debtor surrendering property to a trustee, who in very limited circumstances, mays the property to pay creditors. However, debtors do not have to give up everything they own. When filing under Chapter 7, debtors have the option of claiming state or federal exemptions-one or the other but not both. This means that a debtor can keep specific types of property safe from bankruptcy proceedings, up to a predetermined value. State and federal exemptions are different, and a debtor’s circumstances will dictate which set of exemptions will provide the greatest advantage.
While the state of New Jersey does not have an exemption that specifically protects a debtor’s home, New Jersey residents are able to choose the federal exemptions, which include a $23,675 homestead exemption if filing as single, and doubling that exemption to $47,350 for a married couple filing jointly for bankruptcy. This means that if the total equity remaining in your home is at or below the applicable federal exemption, then the trustee cannot sell your home as an asset. However, if your equity is greater than the exemption, then the trustee may sell your home to pay off creditors.
Chapter 13 Bankruptcy
In contrast to Chapter 7 bankruptcy, Chapter 13 allows a debtor to repay debts through a repayment plan over a number of years instead of giving up assets. Significantly, filing for relief under Chapter 13 does not allow a debtor to escape their mortgage or lien either. However, under Chapter 13, a debtor can remain in his or her home so long as timely payments are made throughout the bankruptcy proceedings.
You Need a Bankruptcy Attorney
If you are struggling with your mortgage, contact Levitt & Slafkes, P.C. From loan modifications, to foreclosure defense, to bankruptcy relief, you have options and we can help you carefully consider your best path forward. With 30 years of practical experience and a reputation of excellence, our attorneys will listen to you and treat you with the respect that you deserve. Call Levitt & Slafkes, P.C., at (973) 323-2953, or reach us online to schedule a free consultation.
We are proudly designated as a debt relief agency by an Act of Congress. We have proudly assisted consumers in filing for Bankruptcy Relief for over 30 years.