How the Pandemic Has Impacted Mortgages

The COVID-19 pandemic has wrought wide-reaching economic implications throughout the country, including substantial layoffs and furloughs in many business sectors. If you have recently lost employment or income as a result of the pandemic, you may have been worried about making your mortgage payments.

Thankfully, the CARES Act, passed on March 27, 2020, introduced emergency mortgage forbearance opportunities, giving many homeowners much-needed relief. Those with loans backed by Fannie Mae, Freddie Mac, the FHA, VA or the USDA, which together encompass almost 75% of the mortgage market, were eligible to apply for forbearance. If approved, you had the opportunity to request up to 180 days of forbearance, and an option to request up to another 180 days if you were still unable to pay at the end of the first period. Many private banks not covered by the CARES Act have also elected to offer forbearance and relief programs.

However, forbearance is not equivalent to forgiveness, and the delayed mortgage payments will eventually need to be repaid. Given the extent and further uncertainty of the pandemic's fallout, it remains possible you will still be experiencing financial difficulties when your mortgage forbearance period ends. If you are still unable to make your resumed mortgage payments, your lender may choose to initiate foreclosure proceedings, meaning you could lose your home.

Of the six types of federal bankruptcies, Chapter 7 and Chapter 13 are the ones used commonly for personal bankruptcies. There are some important distinctions between these two chapters. At the heart of the differences is the fact that Chapter 7 is a liquidation bankruptcy. Nonexempt assets of yours will likely be seized to pay creditors, and most of your unsecured debts (debts with no collateral) will be discharged within a matter of months. Chapter 13, on the other hand, lets you keep your house and other collateral but subjects you to a 3-5 year repayment plan in which you start to pay your creditors.

Based on these distinctions, you can see why Chapter 7 is more attractive for many debtors. At its best, bankruptcy gives you a clean financial slate from which you may work diligently to rebuild your credit and finances on a solid foundation. However, not everyone is eligible for a Chapter 7 bankruptcy. To be eligible, you must first pass what is called the means test.

What is the Means Test?

The means test is a formula that figures your monthly income against your debts to determine if your situation warrants a Chapter 7 bankruptcy over a Chapter 13 filing. The basic tenet is that if you do not bring in enough money per month to even make a dent in your debts, then Chapter 7 is the way to go.

Many people benefit from a well-structured, rightly timed bankruptcy filing. While bankruptcy can give individuals some closure on many different debts and provide a fairly blank slate from which you may build a better financial foundation, there are limits to what bankruptcy can do for you. Knowing these limits is useful in giving people accurate expectations before they file for Chapter 7 or Chapter 13 bankruptcy.

What Types of Debts Are Not Dischargeable?

In the context of discussing what bankruptcy is not able to do, the most important consideration is the debts that will stay with you even after you have received a discharge in bankruptcy. Here are some common examples of these debts:

Will Filing For Bankruptcy Effect My Tax Refund?

Those who file for Chapter 7 or 13 may be able to keep their tax refund, however, whether or not you can keep it depends on the prebankruptcy precautions you take to protect your refund. If you have already filed for bankruptcy, will the trustee assigned to your bankruptcy case take your refund? Is your tax refund safe at any point if you will file for bankruptcy before the year is over?

This blog will answer those and other questions you have about taxes and personal bankruptcies.

If I Want to Keep my Tax Refund, When Should I File for Bankruptcy?

It may be a good idea to file bankruptcy after you have received your tax refund. In fact, you may want to use a portion of your tax refund to pay for the costs to file bankruptcy. That is not uncommon. You also may want to spend your tax refund on other necessary expenses, such as food, shelter, or transportation. If you decide to go this route, don't forget to keep receipts showing how the money was used.

If your personal financial situation has you considering filing for bankruptcy, you should know about your two options: Chapter 7 and Chapter 13 bankruptcies. Chapter 7 bankruptcy, sometimes referred to as 'straight' bankruptcy, is an effective way to wipe most of your debts clean in a matter of months, but there are several drawbacks to this type of bankruptcy. The largest caveat with Chapter 7 bankruptcy is that many people do not legally qualify for Chapter 7. Therefore, Chapter 13 is the only option for many personal bankruptcy filers. However, sometimes Chapter 13 is the better choice for many even if they qualify for Chapter 7.

What's Unique About Chapter 13?

The main differentiator between Chapter 13 and Chapter 7 is that under Chapter 13 bankruptcy, you will enter into a payment plan with your creditors. The plan, which is overseen by a bankruptcy trustee, almost always lasts between three and five years.The good news for you is that you might not even be liable for the full debt amount. An experienced bankruptcy attorney is often able to negotiate down the amount you owe. For these reasons, Chapter 13 bankruptcy is sometimes called 'debt reorganization.'

Another attractive feature of Chapter 13 bankruptcy is that you are allowed to keep valuable and essential property such as your house and vehicle. Some types of property valued at certain amounts are exempt from being seized during a Chapter 7 filing, but you will have much more security for your property and assets under Chapter 13. So, if you are interested in keeping your house, Chapter 13 is usually the optimal route.