Related Terms: Chapter 7 Bankruptcy, Chapter 11 Bankruptcy, Chapter 13 Bankruptcy
When people are not able to repay loans, they can file for bankruptcy
in order to free themselves of the obligation. According to the situation, filing for bankruptcy can help plan a course to repay the debt, or discard the debt completely.
As a home buyer, it is important that you understand how each type of bankruptcy can affect your mortgage. Filing for chapter 7 bankruptcy (also known as liquidation bankruptcy), is when all of your debt is forgiven and you’re obligated to liquidate assets (including property) to make some repayments. If you were to file for chapter 7 bankruptcy, your home would be classified as “exempt,” or “non-exempt.” If the property is exempt, you can hold onto it. A non-exempt property must be surrendered for sale, or you must pay its value in cash.
Chapter 13 bankruptcy operates as a plan to repay your debts. When filing for chapter 13 bankruptcy you are submitting a plan that details how you will repay certain debts, either in full, in part, or not at all, depending on how much you can afford. In such cases you don’t lose rights to your property, since the strategy tomake mortgage payments is included in your repayment plan.
Borrowers should be cautious when filing for bankruptcy because of the consequences that go with it. Your credit score will take a hit, and getting approved for mortgages, loans, or even credit cards in the future will become very difficult.