Does bankruptcy have adverse impact on your mortgage lending? | Personal Finance Views

Saturday, July 26, 2014

Does bankruptcy have adverse impact on your mortgage lending?

It is a well known fact that filing of bankruptcy is the least thing one would like to do. Nobody will be inclined to do it. However, when you are faced with some serious financial problems and you have no other alternative, what can you do? The only way out for you will be to file bankruptcy. Even here, you will have to assess the situation carefully. And if you have any mortgage at present, you should take that into account and the impact bankruptcy will have on it. For your information, a couple of options are available pertaining to bankruptcy. One option is Chapter 7 bankruptcy and the other option is Chapter 13 bankruptcy.


Options of bankruptcy

In Chapter 7 bankruptcy, known also as total bankruptcy, your entire debts, or at least a major portion of your debts will be written off. And you will be asked to dispose some of your assets so that you can make the repayment in respect of some dues. This bankruptcy is also known as ‘straight bankruptcy’ or ‘liquidation bankruptcy.’ Under this, you will be exempted from repayment of debts, of course with a few exceptions. Chapter 13 bankruptcy, on the other hand, is a ‘repayment plan.’ Here, the bankruptcy court will have the power to take a decision as to how your dues are to be cleared. Some of the dues will be settled in full, and the balance debts may be settled in part or may be written off in full.

Two categories – Exempted and Non – Exempted

In this bankruptcy, the whole of your properties will come under two categories – exempted and non-exempted. Whatever properties that fall under exempted category, you may keep them with you during the whole period of bankruptcy proceedings . As far as the properties that come under non-exempted category, you have only two options – either you surrender these properties or pay cash equivalent to the value of the properties as part of the bankruptcy. May be, in a few exceptional cases, you will be allowed to keep possession of properties coming under non-exempted category; it depends on how the bankruptcy trustees decide. To know what will be the impact of chapter7 bankruptcy on your mortgage, you should have knowledge about a ‘loan’ and a ‘lien.’

It is known fact that a mortgage company provides the fund for buying a property. The company will, naturally, have a lien on the property, which means the company has a hold on the property till such time the loan is discharged. When you file bankruptcy under chapter 7, the mortgage company, because of the right it has over the party, will choose to take any action in the matter. However, under chapter 13 bankruptcy, there is no chance of your losing the property. But then you will be asked to submit a detailed plan as to how you will repay the loan. An automatic stay, issued by the bankruptcy court, will prohibit the lender from taking recovery proceedings.

The moment you file the petition for bankruptcy, under Chapter 7, the lenders will not be inclined to consider giving any fresh loan to you, at least for a minimum period of two years. If, however, any lender comes forward to offer you a loan within two years from your filing bankruptcy, it is better you get full details of the offer and go through them carefully. You should consider the total cost involved in the loan offered. If, however, you have filed bankruptcy under Chapter 13, you can apply for and get a fresh loan after one year from the discharge of your bankruptcy petition. All said, before filing bankruptcy petition, you would do well to have frank and detailed discussion with a professional.

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