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Chicago Bankruptcy Question: How are mortgage treated in Chapter 7?

Chicago Bankruptcy Question of the Day: How are mortgages treated in a Chapter 7 bankruptcy?  When you file for Chapter 7 bankruptcy protection in Chicago, you are required to disclose all of your debts and notice must be given to all of your creditors.  This includes any and all primary mortgages, second mortgages and home equity lines of credit.  How that debt is treated in Chapter 7 depends on your individual intention with regard to the property and your financial position at the time of filing.

These days, many people who file for Chapter 7 bankruptcy are electing to surrender their residences or investment properties back to the mortgage companies.  If you elect to surrender the property, then your personal liability on the mortgage(s) is eliminated with the Chapter 7 discharge.  This does not remove your name from title to the property, which requires the completion of the foreclosure process, but it does prohibit any mortgage from pursuing you for any remaining debt after the foreclosure is complete.  Usually you can remain in the property, rent free, until the foreclosure is complete, at which time you must vacate.

If you intend on keeping the property when filing for Chapter 7 bankruptcy, then it must be determined whether or not reaffirmation of the mortgage is in your best interest.  Reaffirmation of a mortgage basically means that you once again assume personal liability for the debt.  This makes sense if the value of the property is at least equal to the amount owed on the mortgage, you have the financial means to maintain your mortgage payments and you want the mortgage company to report to the credit reporting agencies that you are making your payments, assisting in your credit rebuilding process.

If your home, like so many these days, is worth less than what is owed on it, or if you do not currently have the financial means to maintain your mortgage payment, then you certainly do not want to reaffirm the mortgage debt.  This protects you in case you do fall behind on the mortgage and lose the property, so again, the mortgage company cannot pursue you for any remaining debt (known as a deficiency balance).  In these cases, the Chapter 7 bankruptcy discharge does give the borrower some leverage in pursuing a loan modification with the mortgage company.  The borrower can simply tell the mortgage company to either work out a loan modification that works for both parties or else they can take the property back, as the borrower is already protected by the Chapter 7 discharge.  While this certainly does not guarantee a loan modification, it does give some leverage.

If you have a mortgage and are considering filing for Chapter 7 bankruptcy protection in the Chicago area, you want to make sure that you have an experienced bankruptcy and consumer rights attorney representing you.  A good bankruptcy lawyer will be able to explain all of your options to you, recommend the appropriate course of action for your case and potentially assist you in obtaining a loan modification.  The experienced Chicago bankruptcy and consumer rights lawyers at Ledford & Wu are always willing to offer you a free consultation to review your options.

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