Many people who buy a house together may not realize the potential consequences of their joint mortgage if one of them files for bankruptcy.
Depending on the type of bankruptcy, the state laws, and the equity in the house, the bankruptcy filing of one co-owner can affect the other co-owner’s rights and obligations.
In this blog post, we will explore what happens if one person on a mortgage files bankruptcy and how it can impact the other person’s credit, property, and liability
Mortgage Bankruptcy Impact
Here’s a simplified guide to help you understand how it all works:
Chapter 7: Think of it as a clean slate for unsecured debts, but it could mean saying goodbye to assets like your home.
If your partner files for Chapter 7, you might have to decide whether to reaffirm the mortgage or bid farewell to the house.
Chapter 13: This one’s more like a structured plan to tackle debts, including catching up on mortgage payments.
But remember, both partners are on the hook for the plan, affecting finances and credit scores.
Mortgage Ownership:
Joint Mortgage: In this setup, both partners share the debt burden.
If one files for bankruptcy, it could cast a shadow on the other’s credit score.
Brace yourself – the lender might ask the remaining partner to refinance solo if they’re deemed financially fit.
Separate Mortgage: Here, only the filing partner’s share of the loan is at stake.
But don’t let your guard down – their bankruptcy could still rock the boat, potentially putting the whole house in jeopardy. Other Factors:
Lender Policies: Every lender dances to its beat when it comes to bankruptcy and loan tweaks.
Get cozy with them; reaching out directly is key.
State Laws: Some states throw a lifeline with homestead laws, offering extra protection for the non-filing partner’s property interest.
Financial Situation: No matter the bankruptcy flavor, it all boils down to whether the remaining partner can handle the mortgage solo. That’s the real game-changer
Effect of Bankruptcy on Joint Mortgage
When one partner files for bankruptcy while sharing a mortgage, the situation can get intricate, influenced by various factors:
Bankruptcy Type:
Chapter 7: This bankruptcy form involves selling assets to settle debts, potentially including the jointly owned house.
To keep the home, the remaining partner may need to commit to the mortgage and meet financial criteria.
Chapter 13: This route follows a repayment plan where both partners are accountable, affecting finances and credit standings. Mortgage Ownership:
Joint Liability: Both partners share full responsibility for the debt.
If one files for bankruptcy, it could hurt the other’s credit and borrowing prospects.
The lender might demand the non-filing partner to refinance solo if eligible.
Separate Liability: Only the bankrupt partner’s mortgage share is directly influenced.
Yet, their inability to contribute could imperil the entire property. Lender Guidelines and State Laws:
Lender Policies: Each lender has unique rules on bankruptcy and loan adjustments.
Bankruptcy and House Payments
Bankruptcy and mortgage payments are closely intertwined matters that often raise questions among individuals.
Depending on the bankruptcy type, mortgage status, and home equity, retaining or losing the house to foreclosure may be possible.
Here are key considerations:
Under Chapter 7 bankruptcy, retaining the house hinges on staying current with mortgage payments and exempting all home equity.
Failure to do so could lead to the trustee selling the property to satisfy creditors.
With Chapter 13 bankruptcy, house retention relies on the ability to afford mortgage payments and any arrears via a structured repayment plan.
Additionally, exempting home equity or compensating its value to unsecured creditors is necessary.
In both bankruptcy types, an automatic stay halts foreclosure proceedings until the court reaches a decision.
Nonetheless, this doesn’t excuse mortgage payments, which must continue to prevent home loss.
Refinancing after Bankruptcy and Mortgage
Refinancing after bankruptcy and mortgage is possible, but it depends on several factors, such as:
- The type of bankruptcy you filed (Chapter 7 or Chapter 13)
- The type of loan you want to refinance (conventional, FHA, USDA, or VA)
- The waiting period after your bankruptcy discharge or dismissal
- Your credit score and history
- Your income and debt-to-income ratio
- Your home equity and loan-to-value ratio
- The current interest rates and closing costs
Generally, you will have to wait at least two years after a Chapter 7 bankruptcy and one year after a Chapter 13 bankruptcy to qualify for a refinance.
However, some lenders may have more lenient or stricter requirements, and some loan programs may allow you to refinance sooner if you can prove extenuating circumstances.
You will also need to rebuild your credit and show that you can afford the new loan payments.
Credit Score and Bankruptcy Impact on Mortgage
Your credit score and bankruptcy status significantly influence your mortgage eligibility. Here are key considerations:
Bankruptcy filing can lead to a substantial drop in your credit score, potentially hindering mortgage approval or favorable terms.
The type and duration of bankruptcy are crucial factors.
Chapter 7 bankruptcy remains on your credit report for a decade, whereas Chapter 13 persists for seven years. Mortgage lenders may view Chapter 13 more positively since it indicates a commitment to repaying debts.
Despite the bankruptcy, obtaining a mortgage remains feasible.
Options include FHA-backed loans, VA loans, or USDA loans, which often feature lenient credit score requirements, lower down payments, or reduced interest rates compared to conventional loans.
To enhance your mortgage approval prospects post-bankruptcy, focus on rebuilding your credit score, accumulating a down payment, and sustaining a steady income.
Additionally, wait for a specific period following bankruptcy discharge before applying for a mortgage, as waiting periods vary among lenders.