How Bankruptcy Affects Your Mortgage in Washington State

When considering bankruptcy in Washington State, it's essential to understand how it could impact your mortgage. The relationship between bankruptcy and mortgage obligations can be complex, but grasping the details can help you navigate these tough financial waters.

Bankruptcy primarily falls into two categories: Chapter 7 and Chapter 13. Each type affects your mortgage differently. In Chapter 7 bankruptcy, unsecured debts, such as credit cards and personal loans, are discharged, allowing individuals to start fresh. However, secured debts, like mortgages, require different treatment.

In most cases, you can keep your home as long as you continue making your mortgage payments. Washington State follows the "exemptions" system, which protects a certain amount of equity in your home from creditors during bankruptcy proceedings. In Washington, the homestead exemption allows a single filer to protect up to $250,000 in home equity. For married couples filing jointly, this amount increases to $500,000. If your home's equity is below these thresholds, you are more likely to retain your property.

In contrast, Chapter 13 bankruptcy offers a structured repayment plan for individuals with regular income. This type of bankruptcy allows homeowners to catch up on missed payments over a three to five-year period while keeping their home. You'll submit a proposed plan to the court detailing how you intend to repay your debts, including your mortgage arrears. As long as you adhere to this plan, you can avoid foreclosure and retain ownership of your property.

Another significant aspect to consider is the potential impact of bankruptcy on your mortgage lender. Once you file for bankruptcy, an automatic stay goes into effect, halting any collection actions from creditors, including mortgage lenders. However, it's crucial to remember that this is a temporary relief. If the bankruptcy proceedings determine you cannot keep up with payments, the lender may proceed with foreclosure after the stay is lifted.

Your credit score will likely take a hit from filing for bankruptcy, which can also affect your mortgage. While a bankruptcy can remain on your credit report for up to seven to ten years, it may also affect your ability to refinance or secure a new mortgage in the future. However, some homeowners find that their credit scores begin to improve after bankruptcy due to reduced debt levels.

It is also important to communicate with your mortgage lender before and after filing for bankruptcy. They may be willing to work out a solution that allows you to keep your home, even if you have fallen behind on payments. Some lenders offer loan modifications or repayment plans that align better with your financial situation.

In summary, bankruptcy can significantly affect your mortgage in Washington State, and understanding the nuances can help you make informed decisions. Whether you choose Chapter 7 or Chapter 13 bankruptcy, evaluating your options with a financial advisor or a bankruptcy attorney is crucial. They can provide personalized guidance tailored to your unique financial circumstances while ensuring you make the best choices for your future.