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.
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.