Filing bankruptcy triggers an automatic stay that blocks creditors from trying to collect. This stops foreclosure, but if you can't keep paying the mortgage, you'll lose the house eventually. The fate of your home depends in part on which type of bankruptcy you file.
The U.S. Courts website says that if you're concerned about keeping your house, Chapter 13 bankruptcy is often a good choice. In Chapter 13, you spend three to five years paying your creditors all your disposable monthly income — the money you have left after paying basic living expenses. That includes any back mortgage debt. As long as you keep making your current mortgage payments, you have until the plan ends to catch up on any payments in arrears.
Your mortgage lender has a higher priority than most creditors, so if paying the mortgage requires, say, not paying off your credit card balance, that's acceptable. At the end of the payment period, any leftover debt unsecured by your house or other collateral is discharged — wiped away — with a few exceptions, such as child-support payments.
It's trickier to keep your house in Chapter 7 but not impossible. In Chapter 7, the trustee overseeing your case liquidates all your assets — real estate, stocks, vehicles — and uses the money to pay your creditors as much as possible. The bankruptcy court then discharges your remaining debts, again with some exceptions.
Reaffirming the Mortgage
You can wipe out your mortgage debt in Chapter 7 but not the lender's lien on your house. As with Chapter 13, if you can't keep up the mortgage, you lose your house. Unlike Chapter 13, you don't have a payment plan, so you can't catch up on back payments as easily.
When you enter bankruptcy, the mortgage lender may ask you to reaffirm the debt. The U.S. Courts website says this is an agreement that you'll keep paying the mortgage, allowing the debt to survive bankruptcy
If you're not sure you can keep up the mortgage payments, even after discharging your other debts, reaffirming may be a mistake, the Kight Law Firm says. It won't prevent the lender from foreclosing, and depending on state law, you may be liable for any debt remaining after the foreclosure sale.
State and federal law exempt some assets from liquidation. Depending on your state's law, you may be able to choose between the state and federal exemptions, or you might have to settle for the state list. For example, California at the time of writing only allows homeowners to use the state exemptions. Under the state rules, the Nolo legal website says, a single homeowner can usually exempt up to $75,000 of home equity, the value of the home above the mortgage.
The equity exemption can help you keep your home, even if it doesn't cover the full value. Suppose you have a $200,000 mortgage on a $250,000 California house. A bankruptcy sale of the house would pay off the mortgage, but the equity would go into your pocket. As the other creditors get nothing, the trustee probably won't find it worth selling the house.
Chapter 11 works a lot like Chapter 13: You submit a bankruptcy reorganization plan for paying your debts and adjusting your financial affairs over several years. The Bankruptcy Law Network says that as part of the reorganization, you can stretch out the time to pay off back mortgage debt much longer than Chapter 13 allows. Although Chapter 11 is associated with business bankruptcies, individual filers can use it too.
One reason an individual might pick Chapter 11 is that Chapter 7 requires that your income fall below a certain level to file; Chapter 13 sets limits on how much debt you can carry. Those limits don't apply to Chapter 11. However there are also drawbacks:
- The filing fees are more than three times the fees for Chapter 7 or 13.
- It takes much more labor and paperwork to manage the payment plan.
- Creditors have a lot of input into your financial decisions in reorganization.
- U.S. Courts: Chapter 13 — Bankruptcy Basics
- U.S. Courts: Chapter 7 — Bankruptcy Basics
- Nolo: California Bankruptcy Exemptions
- Kight Law: Can I Reaffirm my Home Mortgage? And if I Can, Should I?
- Bankruptcy Law Network: Are You Too Far Behind on Your Mortgage for Chapter 13? Chapter 11 May Help!
- Nolo: Chapter 11 Bankruptcy: An Overview