How Chapter 7 Bankruptcy Can Eliminate Mortgage-Related Debt
Typically, when a prospective client is considering filing chapter 7 bankruptcy one of the first discussions our attorneys have with them begins: “Do you want to keep your house?”. There are always a lot of things to consider: can the client afford to keep the home when they are discharged of their other debts, what are their other living options;and the one that has become the biggest factor recently, is the home now worth less than the mortgage balance?
Due to the recent flooding, many people in the Baton Rouge, Central, Denham Springs, Gonzales and other surrounding areas are now suffering from debt related to a property that they cannot live in nor afford to rebuild while having to pay to live somewhere else. The good news is, if you qualify for chapter 7 bankruptcy and are willing to surrender your property then you can eliminate your mortgage-related debt in as little as 4 months.
That seems a little too simple, but before I jump into a full-scale explanation, let’s breaks for an antidote.
I have the most adorable six-year-old cousin named Ryn. About six months ago Ryn called my father (he’s an engineer) with an interesting question that I’d never even considered asking: “How do you make plastic?”
While it took my dad a minute to sit down and think-out how to explain the plastic manufacturing process to a kindergartener, he called her back later that week and now she can tell you the overview version of how plastic is made.
My point is, there are people who want to know how, why, and by what means a process works, and there are those who are satisfied with the knowledge that the process does work- this post was written with both of those personality types in mind.
Let’s start with those who are happy with the knowledge that “it works”:
The simplest explanation: Those who qualify and file for chapter 7 bankruptcy relief can surrender their homes as part of their case. Since they give up the property purchased with the mortgage loan, once they receive an order of discharge they will be cleared of their mortgage-related debt.
Now, let’s move to those who need to know “how it works”:
A little more complicated: When you enter into a mortgage agreement you are essentially agreeing to a lien (rights to the property) secured by collateral (the property itself) for the amount owed on the loan (debt). This is why mortgages are considered “secured debt”.
When you surrender your home in a chapter 7 bankruptcy you are essentially relinquishing your claim on the property and are left with just the loan/debt part of your original mortgage agreement. Once you surrender the property, the debt related to your mortgage can be treated as an “unsecured debt”.
In other words, by surrendering your collateral you are jumpstarting the foreclosure process and your mortgage company will begin the process of selling your home in an attempt to mitigate its losses. Once the bank/mortgage company sells the property, the difference between the amount owed on your mortgage and the amount gained by the sale of your property is the deficiency. This deficiency is an unsecured debt in your case and (as long as you did not reaffirm the debt) is eliminated when the judge signs the order of discharge.