How Bankruptcy Affects Your Mortgage in California

Filing for bankruptcy can have significant repercussions on your financial obligations, including your mortgage. In California, understanding how bankruptcy affects your mortgage is crucial if you find yourself in financial distress. This article delves into the intricate relationship between bankruptcy and mortgages in the Golden State.

Types of Bankruptcy

There are two primary types of bankruptcy filings for individuals: Chapter 7 and Chapter 13. Each has different implications for your mortgage.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, also known as liquidation bankruptcy, your non-exempt assets may be sold off to repay creditors. When it comes to your mortgage, if you are behind on payments, you may risk losing your home. However, in California, you are allowed to claim certain exemptions that can protect some of your equity in the home.

If you reaffirm your mortgage loan during bankruptcy, you can retain your home by agreeing to continue making your mortgage payments. However, failure to maintain those payments post-bankruptcy can lead to foreclosure.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows you to create a repayment plan to pay back your debts over a three-to-five-year period. This type of bankruptcy is often more favorable for homeowners as it can halt foreclosure proceedings. In California, you can propose a plan to catch up on missed mortgage payments while keeping your home.

Chapter 13 also allows you to rebuild your credit over time, making it a viable option for retaining your home and managing other financial obligations.

Impact on Mortgage Payments

When bankruptcy is filed, an automatic stay goes into effect. This means creditors, including mortgage lenders, cannot pursue collection actions, which can provide you with temporary relief. However, it’s important to remember that the mortgage itself is not eliminated through bankruptcy. You are still responsible for repaying the loan.

If you wish to keep your home, you must continue making your mortgage payments after filing for bankruptcy. Failure to do so can result in the loss of the property. This is particularly critical in California, where the housing market can be competitive, and the risk of foreclosure is present.

Long-Term Effects on Credit

Filing for bankruptcy will impact your credit score significantly. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years, while Chapter 13 stays for 7 years. This reduction in creditworthiness can make obtaining new loans, including mortgage refinancing, more challenging in the future.

However, many individuals find that their credit score improves over time, especially if they adhere to the repayment plan under Chapter 13 or manage to keep current with their mortgage payments post-bankruptcy.

Consulting with Professionals

Navigating bankruptcy and mortgage complexities can be overwhelming. It is advisable to consult with a qualified bankruptcy attorney or a financial advisor in California who can provide tailored advice based on your unique circumstances. They can help you understand your rights, the implications of bankruptcy on your mortgage, and guide you through the process.

Conclusion

In summary, bankruptcy can profoundly affect your mortgage situation in California. Whether you choose Chapter 7 or Chapter 13, it’s essential to understand the long-term consequences and stay informed about your obligations. Make sure to seek professional advice to help you navigate this challenging period and protect your home.