Bankruptcy absolves consumers of some debts if they see no other alternative to their financial situation. Those who qualify often choose Chapter 7 bankruptcy because of the simplicity of it. However, many filers may wonder if they will lose their home.
Mortgages under Chapter 7
Chapter 7 requires the debtor to list non-exempt assets on the petition. The court assigns a trustee to manage the case and sell off non-exempt assets and pay creditors. Non-exempt assets usually include second homes, second vehicles, and luxury items such as jewelry.
Many states allow debtors to exempt a certain amount of equity, or the amount left from subtracting the mortgage from the current value. A debtor may commonly keep an exempt home as long as they don’t fall behind, but a debtor in arrears cannot keep a home in Chapter 7. However, the discharged debt does not remove liens, so if the trustee sells the property, the secured lender gets paid first.
Mortgages under Chapter 13
Chapter 13 bankruptcy is an option for debtors with sufficient income who want to keep their house but who are in arrears on their mortgages. Chapter 13 restructures debt into an affordable payment plan proposed by the debtor. If the court approves the plan, the debtor commonly has three to five years to pay the debts. They do not lose assets as long as they don’t fall behind on the payments.
Unlike Chapter 7, Chapter 13 allows junior lien stripping on second or third mortgages. This means if the home doesn’t have enough equity, the court can convert the lien to unsecured debt. The debtor may have the option to cram down the loan, or converting the amount owed to the amount of the home value.
Debtors can represent themselves, but the bankruptcy process can be complex. They may benefit from having an attorney to help them and give them advice.