For many homeowners, the idea of losing their homes due to overwhelming debt can be a terrifying prospect. Whether you are struggling with credit card debt, medical bills, or mortgage arrears, bankruptcy offers a potential solution. Both Chapter 7 and Chapter 13 bankruptcy provide ways to address your mortgage and may offer a path to protect your home. In this blog post, we will explain how both Chapter 7 and Chapter 13 bankruptcy can help with your mortgage, highlighting the key differences and how each option can impact your ability to keep your home.

The Role of Bankruptcy in Protecting Your Home

When you file for bankruptcy, one of the immediate benefits is the automatic stay, which halts most collection actions, including foreclosure. This stay temporarily stops creditors from pursuing legal actions against you, giving you time to reorganize your finances. The primary question for many homeowners, however, is whether bankruptcy can provide a lasting solution for saving their homes. Let’s break down how both Chapter 7 and Chapter 13 bankruptcy can help you protect your property.

Chapter 7 Bankruptcy and Your Mortgage

1. What Chapter 7 Bankruptcy Can Do

Chapter 7 is a type of liquidation bankruptcy that can discharge many of your unsecured debts, such as credit card balances, medical bills, and personal loans. However, when it comes to your mortgage, Chapter 7 doesn’t automatically provide a solution to keep your home in the long term.

Stopping Foreclosure Temporarily: When you file for Chapter 7 bankruptcy, the automatic stay will temporarily stop foreclosure proceedings. This gives you a breather from creditors, and you may have a chance to work out a loan modification or catch up on missed payments.

Securing Your Home in Chapter 7: If you are behind on your mortgage payments but want to keep your home, Chapter 7 bankruptcy may not be sufficient on its own. If you’re current on your mortgage payments, you can usually keep your home, as long as you continue to make your monthly payments. However, if you are behind on your mortgage and cannot catch up on payments, your lender may continue with foreclosure once the bankruptcy process is complete.

Discharge of Unsecured Debts: If you have significant unsecured debts (e.g., credit cards, medical bills), Chapter 7 may discharge these debts, improving your financial situation and giving you more breathing room to focus on your mortgage. While this doesn’t directly address arrears on the mortgage, it may free up funds to help you make your mortgage payments.

2. Potential Limitations in Chapter 7

Chapter 7 bankruptcy does not allow you to catch up on mortgage arrears or reduce the principal of your mortgage. If you’re behind on payments, your lender may still move forward with foreclosure once your bankruptcy case is discharged, unless you can negotiate a solution with them.

Chapter 13 Bankruptcy and Your Mortgage

1. What Chapter 13 Bankruptcy Can Do

Chapter 13 bankruptcy is a reorganization bankruptcy designed to help individuals with regular income create a repayment plan to pay off their debts over a period of 3 to 5 years. Unlike Chapter 7, Chapter 13 provides a mechanism for homeowners to catch up on missed mortgage payments and keep their home.

Repayment Plan for Arrears: One of the most significant benefits of Chapter 13 is that it allows you to include your missed mortgage payments (arrears) in your repayment plan. Instead of paying the full amount of arrears in a lump sum, you can spread the payments out over the course of the repayment period, making it easier to catch up and avoid foreclosure.

Stopping Foreclosure: Just like Chapter 7, filing for Chapter 13 bankruptcy also initiates the automatic stay, which stops foreclosure proceedings immediately. This can provide temporary relief while you work with your lender to catch up on missed payments through the Chapter 13 repayment plan.

Modification of Terms: Chapter 13 bankruptcy may also allow you to negotiate the terms of your mortgage, including interest rates, payment terms, and late fees. This flexibility can make it easier to manage your mortgage payments going forward.

Protection of Home Equity: In Chapter 13, you generally do not need to worry about losing your home’s equity, as long as you are making the necessary payments under the repayment plan. Unlike Chapter 7, which could result in the liquidation of non-exempt assets, Chapter 13 allows you to retain all of your assets and protect your home, as long as you continue with the repayment plan.

2. Chapter 13 and Second Mortgages

Chapter 13 also offers an advantage when dealing with second mortgages or home equity lines of credit (HELOC). If your home is worth less than what you owe on the first mortgage, you may be able to “strip off” the second mortgage in a Chapter 13 case. This can significantly reduce the overall debt burden on your home and make it easier to keep your property.

How to Decide Between Chapter 7 and Chapter 13 for Your Mortgage

Chapter 7 may be right for you if:

• You have little to no equity in your home.
• You are current on your mortgage payments and want to eliminate other unsecured debts.
• You don’t have significant arrears on your mortgage and are willing to let the property go if necessary.

Chapter 13 may be right for you if:

• You are behind on your mortgage payments and want to catch up over time.
• You want to protect your home from foreclosure and restructure your mortgage payments.
• You have a steady income and can commit to a repayment plan over 3 to 5 years.

Protect Your Home with Bankruptcy

If you’re struggling with mortgage payments and facing foreclosure, bankruptcy may provide the relief you need to keep your home. Chapter 7 can offer temporary relief, but Chapter 13 is often the better choice for those looking to reorganize their mortgage payments and protect their property.

Consulting with a knowledgeable bankruptcy attorney can help you navigate the complexities of the bankruptcy process and determine the best solution for your financial situation.

Worried about your mortgage and home? Contact our experienced bankruptcy attorneys from Winterbotham Parham Teeple, a PC today at 800.400.9000 for a consultation and learn how bankruptcy can help protect your home