Using Chapter 7 Bankruptcy to Avoid Foreclosure

If you are looking to avoid foreclosure on your home by filing bankruptcy, it is sometimes not a bad idea depending on the circumstances. However, Chapter 7 bankruptcy is usually not the best way to go. You’re usually better off with Chapter 13, but sometimes Chapter 7 can help some homeowners.

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How Chapter 7 Bankruptcy can help:

Filing Chapter 7 bankruptcy allows a homeowner to fully wipe out most debts. However, the homeowner may have to give up some property, but this usually is not the case. At the end of the case, the court enters a discharge which forever eliminates the debts included in the discharge.

It is important to know that Chapter 7 clears out the amount that a homeowner owes on their mortgage note. But it only eliminates what they owe personally on the note, not the mortgage lien. This means that if the homeowner is behind in mortgage payments, the lender can foreclose once your discharge is entered.

However, if the homeowner is current on their mortgage payments, Chapter 7 bankruptcy courts do allow the homeowner to keep paying their mortgage, which ultimately allows them to keep their home.
The bottom line here is that if a homeowner is looking to avoid liability for a deficiency judgment, this type of bankruptcy can help.

If you are trying to keep your home when you are behind on payments or to stop the foreclosure process from happening or continuing altogether, this type of bankruptcy will not be as effective as you think it will.

How Chapter 7 Bankruptcy cannot help:

If you are behind on mortgage payments, Chapter 7 bankruptcy is not usually the best way to save your home. Here’s why:

1) You Can’t Catch Up on Overdue Mortgage Payments
Chapter 7 bankruptcy does not have a mechanism for you to catch up overdue mortgage payments through your bankruptcy case. And the bankruptcy court cannot compel your mortgage company to work out any kind of repayment plan with you.

2) No Lien Stripping
Lien stripping is not an option in Chapter 7 bankruptcies. Some circuits have allowed debtors to strip lines in Chapter 7, but most courts do not follow this precedent, and in fact, the United States Supreme Court is considering whether to issue a ruling on this point in the future.

3) It Cannot Force Lenders to Offer Loan Changes
Contrary to what some believe, there are also no laws that require lenders to modify loans in bankruptcy, nor which provide a bankruptcy court the power to compel loan modifications.

Delaying Foreclosure: Bankruptcy’s Automatic Stay

Foreclosure vs. Home Surrender in Chapter 7 Bankruptcy

Should I File for Bankruptcy Before or After Foreclosure?

One Reply to “Is Chapter 7 Bankruptcy a Good Option?”

  1. Many homeowners who are considering filing chapter 7 bankruptcy are wanting to do it by themselves without the help of an attorney. Generally, if you are filing bankruptcy you probably don’t have the funds to pay for a lawyer. I get it – however, it is NOT a good idea to do this on your own. If you plan to, at least be armed with the pitfalls that many homeowners went through when filing alone:

    Prebankruptcy Considerations

    Not needing to file for bankruptcy in the first place. Some people file for bankruptcy because they don’t understand what bankruptcy can and cannot do, and what their alternatives are.

    Filing under the wrong chapter.

    For most consumers, the logical choices are Chapter 7 bankruptcy and Chapter 13 bankruptcy. There are important differences between the two: not everyone qualifies for either or both, and each treats property and debt differently. For example, if you want to save your home from foreclosure, Chapter 13 might be your best bet. If you have low income and no assets, Chapter 7 may be the way to go. If you file for the wrong chapter, you might lose valuable property, or end up not discharging certain debts

    Filling Out and Filing the Petition, Schedules, and Other Documents

    Even if the debtor chooses the correct chapter to file under, pitfalls abound in the paperwork phase of bankruptcy.

    Failure to file required documents. According to the Central District, many self-represented bankruptcy debtors do not file all of the required bankruptcy documents. You can find information on the forms you’ll need, filing fees, and more in our Filing for Bankruptcy: Getting Started section.

    Choosing incorrect property exemptions.

    Property exemptions play a key role in both Chapter 7 and Chapter 13 bankruptcy. (Learn about bankruptcy exemptions and how they work.) You can find the most common state and federal exemptions on the Internet (for example, Nolo has articles on the homestead and motor vehicle exemptions in each of the 50 states). But it’s imperative that you double-check these with current state law – exemptions do change periodically. If you’re filing on your own, it’s up to you to make sure you have the correct law and statute citation.

    If you’re unclear how to list or value a particular item of property, can’t figure out your equity in the property, own property with someone else, or stand to lose valuable property (like your home or car) or property you care about (like a family heirloom), a visit to an attorney may be well worth the money.

    Not understanding the difference between credit counseling and financial management.

    In Chapter 7 and Chapter 13 bankruptcy you must receive credit counseling from an approved provider before you file for bankruptcy, and take a financial management course before you get a discharge. Many pro se debtors are confused about these requirements, and fail to file the proper certificate. Failing to comply with these requirements can result in dismissal of your petition or not getting a discharge.

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