Can I keep my home if I file bankruptcy?  Do I have to list the mortgage company?  What if I’m behind on the payment?  Can I still pay the mortgage payment online?  Will they send me monthly statements?  How do I know that the past due amounts were paid current?  I want to file bankruptcy but I don’t want to lose my home.  I don’t want to list that debt.

Homeowners have a lot of anxiety about filing bankruptcy, and for good reason.  They worry that by filing bankruptcy they will lose the home.  To be sure, there are risks to filing bankruptcy, but the whole idea of filing a case is to protect property and there is no reason a home should be lost or compromised if you observe the following:

  1. Nebraska exemption laws protect the first $60,000 of equity in your homestead.  If your home could not be sold for $60,000 more than what you owe on the mortgage the home is safe when filing Chapter 7.  If the home has more than $60,000 of equity do not file  Chapter 7. Rather, consider filing the alternative type of bankruptcy–Chapter 13–where the trustee does not have the power to liquidate assets.
  2. All debts must be listed in bankruptcy.  You cannot exclude any debt, including mortgage or vehicle loans.
  3. Reaffirmation Agreements.  In Chapter 7 cases the homeowner can sign an agreement to reaffirm the mortgage debt.  Such agreements basically pull the mortgage loan out of bankruptcy.  The only real benefit to these agreements is that the mortgage company will continue to report to the major credit bureaus whether the loan is being paid on time, and continued credit reporting is critical if you will refinance the mortgage loan in the future.  Reaffirmation Agreements are not used in Chapter 13 cases.
  4. Banks Do No Automatically Reaffirm Mortgage Loans.  The number one frustration homeowners experience after filing Chapter 7 is that the mortgage company stops reporting loan payments to the credit bureaus if a Reaffirmation Agreement is not filed with the bankruptcy court.  Banks no longer offer reaffirmation agreements on mortgage loans in most cases unless the homeowner specifically requests one. That means you must call the mortgage company to demand a reaffirmation agreement.  You probably will have to call multiple times, perhaps weekly, to get the agreement.   Why do you have to pester them?  Banks do not view Reaffirmation Agreements as being necessary.  Although bankruptcy wipes out the debt, it does  not terminate their mortgage lien.  So, if a homeowner stops paying the mortgage, the bank still has the right to start a foreclosure whether the loan is reaffirmed or not.  For this reason, banks stopped hiring people to process reaffirmation agreements.  The bank is fine, but you are not. Without a reaffirmation agreement you will find it nearly impossible to refinance a mortgage loan, even if all payments are made on time.  Without the reaffirmation agreement there is no credit bureau reporting, and without that you cannot find a bank that will refinance the loan.
  5. Keep Track of your Mortgage Payments.  It is very common that I handle cases where the mortgage company says they did not get payments due after the case was filed.  Most of the time the bank is right, but not always.  Sometimes banks apply payments to the wrong account.  Sometimes they don’t know where to apply a payment and put the money in a “Suspense Account.”  Sometimes homeowners are unaware that the payment has increased and they pay the wrong amount.  If the bank says you did not pay you need to have proof of payment, i.e., canceled checks, bank statements, money order receipts, Western Union wire receipts.
  6. Pay the Mortgage Through Your Bank Account, Not Money Orders.  I hate it when clients pay the mortgage with money orders.  Why?  Because a money order receipt only proves that you bought a money order, it is not proof the bank received the payment.  To prove payment you must purchase a “trace report” from the money order company showing the bank actually deposited the money order.  Unless you buy a money order trace you have no idea if the bank accepted the payment.  Banks lose a lot of checks.
  7. What if the bank won’t accept my payment over the phone?  It is common for banks to cease online mortgage payment access when a bankruptcy is filed until a Reaffirmation Agreement is filed or until a Chapter 13 case is completed.  Some banks will not take payments over the phone until the case is over.  If they will not accept an online or telephone payment just send them a regular check in the mail.
  8. What if the bank returns my payment?  Banks return payments for three general reasons:  (1) They are not aware the bankruptcy was filed; or (2) you are paying the wrong amount; or (3) the amount you are paying does not bring the loan current and they want to make it 100% clear to you that they will not accept partial payment.  When payments are returned bring the returned payment and the accompanying letter from the bank to your bankruptcy attorney.  We are generally able to get the bank to accept the payment if we route it to the correct department or to the bank’s attorney.
  9. Keep a chart of your mortgage payments.  When banks say that the mortgage payment is behind I have no clue if they are wrong or right until I see a list of every payment made, the date each payment was sent, the date the payment cleared the bank account, the amount of each payment, the check number for each payment, and the bank statement showing each payment made.  Keep a chart or a table listing this information while the bankruptcy case is open, especially in those 3 to 5 year Chapter 13 payment plans.
  10. Homeowners have the burden of proving payment.  If the bank says a payment was not made that is assumed by the court to be correct unless the homeowner has evidence to the contrary.  For this reason it is very important to keep your bank statements and to highlight each mortgage payment that cleared the bank.  Save those bank statements while you are in bankruptcy.  Keep a list of all payments made.  If you are crazy enough to pay the bank with money orders, keep an organized file of each and every payment made.

Image courtesy of Flickr and Andrey 77 dron.