Is Bankruptcy an Option If You Default on Your Mortgage?
Yes, bankruptcy is an option when you’ve defaulted on your mortgage. But it’s not a one-size-fits-all solution.
If money feels tight, you’re not alone. Inflation and the high cost of living have made it a challenge for many Oregonians and Washingtonians to make their monthly mortgage payment. Home foreclosures and mortgage defaults are increasing nationwide.
Let’s dive into a few of the factors you should consider.
I’m in mortgage default: should I consider bankruptcy?
If you’ve defaulted on your mortgage and you’ve considered bankruptcy, you’re doing the right thing in exploring all of your options. Gather all of the information you need so you can make an informed decision. That may include consulting with an experienced bankruptcy attorney.
After your mortgage is in default, it can enter foreclosure.
What happens when you default on a mortgage loan?
First, you’ll get notices in the mail. These letters will tell you exactly how much you owe and give you deadlines to catch up. Lenders must follow specific rules before they can take your home. This process can take several months, which gives you time to explore your options.
Your credit score will also drop significantly when you default. Payment defaults and Foreclosures stay on credit reports for seven years.
Here’s something important: defaulting doesn’t mean you’re out of options. You might be able to work out a payment plan with your lender, refinance your loan, or sell your home before foreclosure happens.
Can bankruptcy stop foreclosure?
Yes, bankruptcy can temporarily halt foreclosure. However, bankruptcy won’t magically make it go away. Think of bankruptcy more like a “time out,” an opportunity to figure things out and reorganize debt to make it more manageable.
Before you file for bankruptcy, you need to decide what your goal is – are you most interested in discharging your debt, or keeping your home? You might be able to do both. Let the answer to this question determine your next move.
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Should you file bankruptcy before or after foreclosure?
Usually, we recommend filing before foreclosure if keeping your home is important to you.
Chapter 13 bankruptcy lets you create a three to five year payment plan to catch up on your mortgage while keeping your house. Chapter 7 might not save your home, but it can eliminate other debts and give you a fresh start.
If you file bankruptcy before foreclosure:
- The process stops immediately.
- You might be able to keep your home through Chapter 13 bankruptcy.
- You’ll have time to catch up on missed payments.
- You could eliminate other debts.
If you wait until after foreclosure:
- You’ve already lost your home.
- You might still owe money (if the house sold for less than all liens).
- Your options become more limited.
- The damage to your credit has already happened.
If You Want to Discharge Your Mortgage Debts
If you’re in significant debt and relief from that debt is your top priority, you may want to consider Chapter 7 bankruptcy.
Sometimes it is just best to let the home go and start fresh. If you’re in foreclosure, filing Chapter 7 will put an automatic stay on proceedings while the case is pending. This is temporary – typically about three or four months. As a result of your Chapter 7 bankruptcy, the court will discharge all of your dischargeable debt. Once the Chapter 7 is over, the foreclosure proceedings will resume. This will give you time to move out in an orderly fashion.
If You Want to Keep Your Home
If you’re in foreclosure and want to keep your home, you will want to file for Chapter 13 bankruptcy. Filing for Chapter 13 bankruptcy will put an automatic stay on foreclosure proceedings. It allows you to reorganize your debts into a more manageable payment plan. As long as you adhere to the plan, you can keep your home. Part of the reorganization payment will go to making up the missed home payments.
Can bankruptcy help with mortgage defaults?
As always, the details of every case are unique – we can’t provide one-size-fits-all answers. We’re here to provide you with some basic information that will help you decide whether to get in touch with a bankruptcy attorney.
If you’re in Oregon or Washington, the bankruptcy attorneys at OlsenDaines will be happy to discuss the details of your case with you. Feel free to send us an email, or call to schedule a free consultation in our office.
