Bankruptcy can be a useful tool to protect a secured asset, such as a home, from foreclosure or repossession. First, in the case of a chapter 13 bankruptcy, an automatic stay will go into effect, which requires that debt owners cease all collection activity and puts a hold on any legal proceedings concerning the collection of a debt. The arrearages on the mortgage, that is any late payments accrued, can be consolidated and included in a repayment plan. This reduces the amount on the arrearages to a manageable payment, allowing them to be paid off within the time limit set by the bankruptcy court, usually three to five years. In order for this option to be viable, a petitioner must have enough income to make the existing mortgage payments on a monthly basis.
If a secured asset is underwater, that is, if its value is less than the amount owed, a chapter 13 bankruptcy can strip second and third mortgages of their secured status. That means that, though the debts may not be discharged, they will not be tied to the house, and they become last in line to be repaid. Similarly, if a first mortgage is greater than the value of the home to which it is attached, the amount of the mortgage above the value of the home may be separated from the mortgage, stripped of its secured status, and incorporated into the repayment plan.
In a Chapter 7 bankruptcy, a bankruptcy trustee may order assets liquidated to repay unsecured creditors. This means that, if a home has sufficient equity, the trustee may force the sale of a home in order to create money to pay off debts that would otherwise be discharged. If a homeowner is behind on payments, Chapter 7 does not provide a mechanism to catch up as Chapter 13 does, although it does institute an automatic stay on foreclosure proceedings.
There are other options besides bankruptcy to save your home from foreclosure. Loan modifications are often available to those who qualify under the lender’s criteria. Government programs also exist to assist homeowners. A bankruptcy attorney can help determine the best course of action in each individual situation.