What happens to your home after your bankruptcy case is over?
Most people who file bankruptcy are terrified that just filing bankruptcy will cost them their home.
They won’t let me keep my home, will they?
Sure they will.
The Chapter 7 bankruptcy trustee doesn’t want the house if there’s no value in it, He’s looking for unencumbered value that can be paid to unsecured creditors.
The senior lender is content if you pay the mortgage.
But what about the junior lien, the HELOC, or line of credit loan, that is junior to the first mortgage? That lien remains a valid encumbrance on the house, after the bankruptcy discharge.
If the house is underwater, as many California houses still are, the junior lien is unlikely to foreclose.
Just like the trustee in bankruptcy, the junior lien holder understands there’s nothing there for them.
Now, at least.
Surviving lien
That underwater mortgage lien is like a leach: it attaches to the house and it sucks up any appreciation that the house may enjoy.
Long silent junior liens are now foreclosing
If the market makes the house more valuable, that increase in value is available for the junior lien.
If the market stays the same, but you pay down the senior mortgage, more of the house’s value is available to secure the junior lien.
So, unless you do something, any improvement in the home’s price just benefits the HELOC.
Alternatives
If what you are paying on the first mortgage is comparable to rent, and you are content to never have equity in the house, you don’t need to do anything. Just know that you’ll never be able to sell the house and put money in your pocket.
If the junior lien is totally underwater, consider filing a Chapter 13 to strip off the lien, Or converting your open Chapter 7 to 13.
If the price of keeping the house is reasonable and you hope to build value for yourself in the property, you may want to try to buy out the junior lien. There is a real appeal for some lenders in cash now. They may not have the patience to wait for things to improve.
Make a plan for the house you are keeping after a bankruptcy.
More
Liens you can wipe out in bankruptcy
Your to-do list after bankruptcy
How Chapter 13 helps you keep your house
Your credit report after bankruptcy
Image courtesy USGS.
