Bankruptcy In Michigan: How It Affects Your Mortgage And Property Value

by Oct 30, 2021

Knowing how bankruptcy works in Warren, Michigan is important before filing for one. Whether you plan to file Chapter 7 or Chapter 13, here are some things to keep in mind when filing in the state.

Bankruptcy In Michigan: The Basics

In most respects, filing for bankruptcy in Michigan is similar to filing in another state. It works by unwinding contracts between you and your creditors—that’s what gives you a fresh start. The bankruptcy process falls under federal law, not Michigan law.
However, Michigan’s laws play a significant role in bankruptcy, too. For instance, they determine what property you can keep in bankruptcy.

Choosing The Right Bankruptcy Chapter

Most people file either a Chapter 7 or a Chapter 13 bankruptcy. Below is a short explanation that should clear things up.

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Chapter 7 Bankruptcy

For a variety of reasons, a Chapter 7 is often the first choice of bankruptcy filers. The process is quick, only taking a few months to complete. You also don’t pay anything to creditors.

It is ideal for people whose property consists of essential items for living and working. People with more assets may lose them, however, especially if they own
unnecessary luxury items. You might have to give up your house or vehicle if you have too much equity in them or you’re behind on your payments.

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Chapter 13 Bankruptcy

On the other hand, Chapter 13 filers must pay creditors some or all of what they owe through a three- to five-year repayment plan. However, the payment plan allows Chapter 13 to offer benefits that are not available in Chapter 7. Not only do you keep all of your property, but you can also keep your home from foreclosure or your car from repossession. This chapter allows you to force a creditor into a payment plan if you need time to repay a debt you can’t discharge in bankruptcy.

The biggest downside of this chapter is that it can be expensive. Many people cannot afford the monthly payment.

How Bankruptcy Affects Your Mortgage

There are established procedures for declaring bankruptcy. You don’t automatically lose your house. In addition, if you have been current on your payments up to this point, your loan will not automatically become due.

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Effects Of Chapter 7

Your existing property will be either exempt or nonexempt when you file Chapter 7. When a property is exempt, you will be able to keep it throughout the bankruptcy process so long as you stay current on your payments. On the other hand, nonexempt property has to be surrendered or the value has to be paid in cash as part of the bankruptcy process.

To have the best chance of keeping your house, your house must be considered exempt from bankruptcy, so it is important to know how exemptions are determined.

Before a house can be considered for an exemption, you usually have to live in it for a certain period of time. If you file under the federal statute, you must have owned the home for at least 40 months.

Exemptions are also based on the amount of equity you have in your home, which requires you to know its value. You can exempt a certain amount of equity from being used to repay creditors and lenders under state and federal statutes.

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Effects Of Chapter 13

In a chapter 13 bankruptcy, borrowers do not lose their property. In your repayment plan, you will include details on how you plan to pay your mortgage. Once Chapter 13 is filed, an automatic stay is issued, in which creditors must cease collection efforts.

There are a couple of important caveats here: First, you must keep up with mortgage payments after you file. Your reorganization plan can include missed payments if you’re behind on your payments, but you must make sure all of these debts are paid back by the end of the timeline.

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