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Can I Keep My House out Of Bankruptcy?

Most homeowners who file for bankruptcy want to continue paying their mortgage payments and continue living securely in their home. They will typically tell us that they want to keep their home out of bankruptcy. When they tell me this, I tell them that its really simple.

"When you file your bankruptcy, of course you can keep your house as long as you keep making your mortgage payments as required. But you can't 'keep your house out of bankruptcy'. You have to fully disclose everything you own and all of your debts when you file for bankruptcy. And since you own your house, and you have a debt to the mortgage company, you have to list your house as an asset and your mortgage as a debt. It's really no big deal and nothing to worry about. Just make your mortgage payments like you're supposed to, and when you have paid the house off, you will own it free and clear."

There are a couple of other important things that homeowners should know when they file for bankruptcy. When they get their bankruptcy discharge, it usually means that all of their debts have been legally wiped out. And this means that their debt to the mortgage company has also been wiped out. This might be shocking to some people. How could they no longer owe money to the mortgage company? Well, the debt has been wiped out, but the actual mortgage is not wiped out, and the mortgage is an invisible lien against their home.

What does this all mean to the homeowners who have filed for bankruptcy? It actually means quite a few things. For example:

  1. If the homeowners want to keep their home, they continue to pay their mortgage payments on time, and eventually their mortgage will be paid off, the mortgage lien on their home will be released, and they will own their home free and clear.

  2. But what happens if the homeowners run into financial trouble in a few years, and they can no longer afford to pay the mortgage payments? If they can no longer pay the mortgage, sooner or later the mortgage company will start a foreclosure lawsuit against the homeowners. The mortgage company will probably give them some opportunities to catch up on their payments or to obtain a loan modification, and those options would stop the foreclosure.

  3. The homeowners could also file another bankruptcy, probably a chapter 13, and they could save their home by taking 5 years to pay back the mortgage arrears by making monthly payments to the chapter 13 trustee.

  4. Well, what if the homeowners, once they fell behind on the mortgage, never made another mortgage payment? The result would be that sooner or later the mortgage company would file a mortgage foreclosure complaint against the homeowners, and at some point the home would be sold at a sheriff's sale. Usually, however, the homeowners could still continue to live in the home for some time after the sheriff's sale, even though they haven't made a single mortgage payment since way back when. Eventually the homeowners will have reached the end of the road, and they will have to leave their home.

    If you want to look at this from a good news/bad news perspective, the bad news of course is that the homeowners have had to leave their home and they are no longer home owners. The good news is that while they continued to live in their home, they didn't make a mortgage payment for maybe 2 or 3 years, or even longer, because in New Jersey it usually takes a pretty long time to foreclose from start to finish. So they basically lived for free for a long time.

    And another piece of good news is that because the homeowners got a bankruptcy discharge many years ago, it means that the mortgage company can never collect another dollar from them, no matter how much money the mortgage company lost because the homeowners didn't pay their mortgage for a such long period of time.

  5. What you can possibly learn from all of this is that once a homeowner gets a bankuptcy discharge, the homeowner could legally do the following: the homeowner could simply decide he never wants to make another mortgage payment, and while not paying the mortgage, he wants to legally continue to live in the home pretty much for free for as long as possible. He figures he's got a good thing going, and he knows that once he has to leave, he still will never be required to pay the mortgage company any money.

    So his goal is to continue to live in his home for as long as he possibly can, and then when he eventually has to say good bye to the place where he's been living without paying a mortgage payment, the mortage company won't be able to come after him for any money whatsoever.

    Now I suspect that most homeowners would not choose to do this, but I can tell you that I've had clients who have not made mortgage payments for four years, five years, and even longer, and they were still living in their homes.

  6. There's one more thing I want to tell you about your mortgage debt being forgiven by the bankruptcy discharge. Since you no longer officially "owe" any money to the mortgage company, if and when you make your monthly mortgage payments on time, you will not get credit on your credit report for doing that, and making payments on time will not help your credit score.

Hopefully you now understand that the reason for this is because when you pay the mortgage company after having received your bankruptcy discharge, you are making a payment that you are no longer legally obligated to pay, so you are not going to get recognition or credit for paying something that is "no longer your legal debt."