What happens to mortgages in bankruptcy?
It depends on which chapter of bankruptcy you file under and what your intentions are.
If you file a chapter 7 and you want to keep the home, you will continue making payments as you normally would. However, you should be certain that your equity does not exceed the applicable exemption amount otherwise you may lose the home. An attorney can assist you with that. Further, unless you file a reaffirmation agreement, the note will be discharged. This means that you are not personally liable for the mortgage note. However, the mortgage/deed of trust which gives the lender a lien on the home will not be impacted by the bankruptcy. Therefore, you must continue making payments if you want to keep the home. If you sign a reaffirmation agreement, this may help you qualify for a refinance or loan modification down the road and should have a positive impact on your credit. By signing a reaffirmation, you will once again be personally liable so be sure you have adequate income and equity before signing one.
If you file a chapter 7 and you have a HELOC or second mortgage, the information above still applies. Regarding second mortgages, you can discharge the debt in chapter 7 or chapter 13. However, you cannot remove a consensual lien in a chapter 7. When you take out a HELOC, the lender can pursue you and/or the home (foreclosure) for the unpaid balance. When you file bankruptcy, the note will be discharged. The deed of trust will remain.
If you file a chapter 13 and you wish to keep the home, you just make normal payments. If you are behind on the mortgage, you can bring those payments current through the chapter 13 plan.
It may be possible to void a second mortgage in a chapter 13. However, the home must be worth less than what you owe on the first mortgage. In today’s market, that is rare.