The bankruptcy process is designed to forgive the debts that you owe to your creditors while ensuring that they receive some compensation in return. Since they’re so massive, mortgages are one of the most common causes of bankruptcy filings. They’re also often the most difficult obligations to settle.
If you file for Chapter 7 bankruptcy, your court-appointed trustee will almost certainly seize the title to your house. Although you’ll be released from the obligation to make further payments on your mortgage, you’ll also lose all of the equity that you’ve accumulated in your home. If they haven’t already, your bank will begin foreclosure proceedings against you and will expect you to vacate the property within a given time frame.
You may choose to remain in your house at any point during the bankruptcy or foreclosure process by reaffirming your mortgage. In a Chapter 7 bankruptcy, reaffirmation involves reinstating your mortgage obligation as it existed prior to the filing of your bankruptcy petition. In a Chapter 13 bankruptcy, reaffirmation may be integrated into the court-brokered repayment plan to which you and your creditors have agreed. In this case, it may involve a longer window of repayment, lower interest rates, or a combination of the two.
If you choose not to reaffirm your mortgage, you’re under no obligation to continue paying it down. In fact, you’ll receive no equity or other benefits in exchange for further payments. However, the foreclosure will remain in force and the bankruptcy process will proceed apace. If you choose to remain in your home once the foreclosure has been finalized and your lender has re-taken control of the property, you may be forcibly evicted from the premises.
In other words, failing to reaffirm your mortgage after bankruptcy will necessarily result in foreclosure. If you choose to remain in your house for too long, it may also result in your eviction.
Unless your state’s property exemption law permits you to shield sufficient equity in your home to preclude its seizure, you should begin making other living arrangements as soon as you file for bankruptcy. Whether you’ll be able to keep your home after your filing depends entirely upon your state’s exemption laws. For instance, Arizona allows homeowners to exempt real property in amounts up to $150,000 while Arkansas permits unlimited exemptions on properties that occupy one-quarter of an acre or less within an incorporated town or city.