As we all know, life does not remain constant even if your mortgage payment does. Unfortunately, if you can no longer afford your mortgage payment, filing for Chapter 7 bankruptcy will not lower it. But there are other options that can help. Read on to learn more about why Chapter 7 does not lower your mortgage payment and how you may be able to reduce it through other means.
For information on lowering your mortgage debt in Chapter 13 bankruptcy, see Your Home and Mortgage in Chapter 13 Bankruptcy.
Your mortgage lender typically has a security interest (lien) in your home. If you stop making your mortgage payments, it can foreclose on your house to satisfy its loan. Chapter 7 bankruptcy does not get rid of the mortgage company’s lien on the house. Your discharge only wipes out your personal liability on the mortgage note. This means the lender can no longer come after you personally if you don’t make your payments, but it retains the right to take the house back through foreclosure. As a result, you still have to continue making mortgage payments if you want to keep your house. (To learn more see, What Happens to Your Home in Chapter 7 Bankruptcy.)
When you took out your mortgage, you signed a contract with your lender agreeing to certain repayment terms. Filing for Chapter 7 bankruptcy does not alter those terms. Chapter 7 bankruptcy is designed primarily to wipe out your general unsecured debts. It doesn’t eliminate a mortgage lien or modify the terms of your loan. As a result, you can't reduce the amount of your mortgage payment by filing for Chapter 7. However, if your mortgage payment is too high, there may be other ways to lower it.
Bankruptcy may help you in other ways, however. For example, it may free up money so that you can better afford your mortgage payment. To learn more, see Chapter 7 Bankruptcy and Foreclosure.
Here are some things you can do that might lower your monthly mortgage payments.
Your mortgage lender’s goal is to make the most amount of money it can from your interest payments. If your lender forecloses on your home, it doesn’t make any more money from interest. Further, a foreclosure may not even satisfy the entire balance of your loan if your home is upside down (meaning the value of the house is less than the balance of your mortgage). As a result, your mortgage lender will usually be willing to work with you so that you can keep your home and continue making payments.
A loan modification permanently changes the terms of your original loan. In most cases, it will lower the amount of your monthly mortgage payment by reducing your interest rate or extending the length of your loan. You may be able to apply for a loan modification through your lender or a government program. However, depending on your lender or the government program, you must satisfy certain criteria before you can qualify for a loan modification.
When you refinance a loan, you essentially take out a new loan to pay it off. If you have good credit, you may be able to refinance your existing loan to obtain better loan terms. Your new loan may have a lower interest rate or a longer repayment period that can lower your monthly payment. However, if your house is upside down, it may be very difficult to refinance your existing mortgage.