Both Chapter 7 and Chapter 13 bankruptcy offer relief from mortgage debt, but depending on your circumstances and the particulars of your case, it may also help you to avoid foreclosure and to remain in your home.
Chapter 7 Bankruptcy and Foreclosure
If you file Chapter 7 bankruptcy and you want to avoid foreclosure, you will need to pay your current mortgage and any delinquent payments you owe. The benefits of Chapter 7 bankruptcy is that in most cases it will stop a foreclosure in its tracks, if only for a short time. This will give you time to do one of two things: 1) pay off delinquent mortgage payments; or, 2) save money so that you can find somewhere else to live. Chapter 7 bankruptcy will not allow you to remain in your home without paying the mortgage, so if you want to avoid foreclosure, you must negotiate a payment plan with your lender.
Chapter 13 Bankruptcy and Foreclosure
If you’re facing foreclosure and you file Chapter 13 bankruptcy, you can remain in your home as long as you pay your current mortgage and pay off any delinquent mortgage debt over the course of your repayment plan. For example, if your mortgage is $800 a month, but you’ve missed six months of payments. You will need to continue to pay your $800 a month mortgage plus pay off the six months of back payments over the course of three to five years. You may discharge a second or third mortgage in bankruptcy if those loans are no longer secured by the value of your home. For example, if your home is currently worth $100,000 and you have a primary mortgage for $100,000 and a second mortgage for $20,000, then the $20,000 second mortgage may no longer be treated as secured debt. As an unsecured creditor, your second mortgage lender will lose repayment priority and that debt may be forgiven if you’re unable to repay it in the three to five years you’re in Chapter 13 bankruptcy.
Bankruptcy’s automatic stay is a powerful tool that gives debtors immediate relief from collections activity. This means that if you file bankruptcy in time, you may be able to stop a foreclosure filing and remain in your home. However, if a foreclosure has already been filed on your home, you may not be able to stop the process. That’s why it’s important to seriously consider bankruptcy as soon as you realize you’re unable to pay your mortgage.