or the typical homeowner, there are 2 bankruptcy options, Chapter 7 and Chapter 13.  There are different consequences, depending on which one is used.  Initially, filing bankruptcy will stop any further foreclosure action, including a foreclosure sale, until the bankruptcy trustee allows the lender to continue forward. It is important make sure the right chapter is used for the needs of the borrower.

Chapter 13

This is most utilized as a way to save the home.  If the lender is unwilling to modify the mortgage, under Chapter 13, the borrower can offer a plan to repay the arrears over a period of years while continuing to make the current mortgage payment. Normally, this would not result in a lower payment, but a higher one because the homeowner would still have to pay the lender the current monthly payment and in addition pay the bankruptcy trustee a monthly payment to make up the arrears. Chapter 13 allows the homeowner to keep the home as long as the payments that are approved under the plan are made. There are circumstances in which this makes sense. Again, it is important to get the proper information so the homeowner can make an informed decision.

Chapter 7

Under Chapter 7,  there is a complete sale of the borrower’s assets, with certain exemptions.  Those exemptions vary from state to state.  If the house is included in the Chapter 7, the trustee in bankruptcy has 2 choices.  If there is equity in the property, the trustee can choose to sell the house and use any extra money, minus the homestead exemption, to pay other creditors.  If the amount of the mortgage plus any homestead exemption is greater than the house value, the trustee will have no interest in the house and allow the lender to continue with the foreclosure process.  Depending on the circumstance, a Chapter 7 can be a method for a borrower to eliminate all other debts and still keep the home.

Bankruptcy can be a tool to save a home.  However, it has risks and there are long term consequences for the homeowner.  That is why it is important to have an attorney that is knowledgeable in all aspects of foreclosure defense and can use the method that is most beneficial for the distressed homeowner.

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