If I Am Behind on My Mortgage, Can I Save My Home in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy cannot save your home outright, but it can be helpful if you are in foreclosure.

A Chapter 7 bankruptcy, by itself, will not save your home from foreclosure. But there are times when Chapter 7 will be helpful to a homeowner in a foreclosure.

What a Chapter 7 Bankruptcy Can’t Do

Chapter 7 is called a liquidation bankruptcy. Your non-exempt assets are turned over to the trustee to be sold and the money is used to pay your creditors. By its nature, there are things a Chapter 7 cannot do to help you with your foreclosure.

No court-imposed payment plan. You can’t force a mortgage holder to go along with a payment plan under Chapter 7.

No extra time to cure back payments. You can’t force a mortgage holder to give you more time to bring your mortgage payments current under Chapter 7.

No reduction in mortgage payment by stripping off second mortgages. You can’t strip off second mortgages to reduce your overall mortgage payments in Chapter 7 even if the second mortgage exceeds the value of your house. Only Chapter 13 Bankruptcy can strip-off second mortgages.

You may be able to do some or all of the above things in Chapter 13 bankruptcy, however. To learn more, see Your Home in Bankruptcy.

How a Chapter 7 Can Help

When you file for bankruptcy, something called an “automatic stay” goes into effect.  This means that all collection actions must stop -- at least temporarily. You can also discharge most unsecured debt without having to make payments over a number of years. As a result, there are benefits to filing a Chapter 7 when you are in foreclosure.

Buys time to negotiate or plan. When the automatic stay goes into effect, the foreclosure action will be stopped until the mortgage holder gets permission from the bankruptcy court to proceed. It might be short, but you can use this extra time to negotiate with the mortgage holder, find alternative financing, or make plans to surrender the property and find new accommodations.  

Makes the mortgage holder produce the required documents. The mortgage holder will try to get permission to proceed with the foreclosure by filing a motion for relief from stay in the bankruptcy court. If you have claimed the home as exempt, the mortgage holder’s motion will probably be granted unless it  doesn’t have the appropriate documentation (such as the original note). If it doesn't have the documents, it might not get the court's permission to proceed.

Frees up money for mortgage payments. A Chapter 7 will allow you to discharge your unsecured debts without making payments over a period of years. This often means you'll have more income available to devote to your mortgage payments. This could leave you in a better position to work out a payment schedule with your mortgage holder. Or, you could file a Chapter 13 bankruptcy when your Chapter 7 is over -- this would give you time to cure mortgage arrears and might allow you to strip off second mortgages which exceed the value of your home.

Exceptions to the Automatic Stay:  Multiple Filings

You may lose the benefit of the automatic stay if you file multiple bankruptcies within a year unless you can show the court that there is good cause to re-impose or continue the stay. Also, once a mortgage holder obtains bankruptcy court permission to proceed with the foreclosure and properly records the order in the public records, a subsequent bankruptcy filing will not stay a foreclosure by that mortgage holder again until two years have passed.  This is unless you obtain a bankruptcy court order re-imposing the stay by showing the court good cause and a change in circumstances.

When Chapter 7 Is the Wrong Option

If your house is worth more than the mortgage and the equity is not fully protected by the exemptions available in your area, filing a Chapter 7 would be the wrong option. Even if you claim a portion of your property as exempt, if there is value that is not exempt, the trustee may be able to take possession and sell the property. Your exempt value would then be paid to you out of the proceeds but the house would no longer be yours. In this case, you may want to explore a Chapter 13 Bankruptcy.

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