What happens to my mortgage if I file for bankruptcy?

When you declare bankruptcy, the ownership of your share of the home is transferred to your trustee. They gain control over the house and can sell it to repay your debts.

A mortgage is a secured debt and the lender can repossess your home if you fall behind on your monthly repayments. Generally, mortgage contracts allow the mortgagee to sell the home if one or more owners are declaring bankruptcy with a mortgage.

Even if there is no home equity, the trustee or the secured lender can still make a claim against your home. The trustee may not sell the home but may lodge a caveat to prevent you or the co-owner from selling it. The home equity may be created over a period as property prices increase or mortgage payments are made. In this case, the trustee may reconsider selling the home.

If you co-own the home with one or more people, the trustee acquires ownership of your share. You lose all legal rights to deal with the house, and the co-owner/s also cannot do anything with it without the trustee’s consent.

If the co-owner is also going bankrupt with a joint mortgage, they may opt for the same trustee or another trustee who then owns their share of the home. If the co-owner is not filing for bankruptcy and wants to retain the home, they can make an offer to your trustee to purchase your share of the property before your bankruptcy. However, the trustee is not obligated to agree to the co-owner’s offer as it is their duty to procure the best deals for your creditors.

If you’re the sole owner, the sale proceeds are first used to repay secured loans. The balance amount is used by the trustee to cover your unsecured debt and their own fees. Any remaining money is then returned to you.

If you co-own the property, the sale proceeds are still used to repay secured loans. The balance amount is then proportionately divided between the co-owners. Your share is used by the trustee to repay unsecured debt.

If you jointly own a property with your spouse but are facing trouble repaying your personal debt, you can file for bankruptcy as an individual. Your spouse then becomes the non-debtor and is considered as the non-filing spouse. They aren’t listed as a debtor but your marriage will be duly noted.

When you file for bankruptcy as an individual, only your personal debts like outstanding credit card debt, student loans, and store cards are discharged. Your bankruptcy doesn’t affect your spouse’s credit score, debt, personal assets, and income. However, as you are married, the non-filing spouse still needs to provide their complete financial details including personal assets, joint assets and liabilities, and income. This information is used to determine the compulsory repayments.

An individual bankruptcy filing can affect your non-filing spouse under the following circumstances:

• They are a guarantor of a loan
• They jointly own a property with you
• They have a joint liability with you

There is no restriction on applying for a home loan after bankruptcy dismissal. However, your credit report will show your bankruptcy for two or five years and rebuilding creditworthiness takes time. It is often a good idea to start saving and adhere to a budget to track your money. For more assistance, you can contact an experienced professional to guide you through the entire process.