When a homeowner files for Chapter 7 bankruptcy, what happens to the home depends on various factors, including how much equity the homeowner has. A Chapter 7 bankruptcy wipes out all the debts that federal law allows you to include on the discharge, freeing you of legal responsibility for those obligations. You'll also get an automatic stay against your creditors when you file, which temporarily prevents the creditors from starting or proceeding with any collection actions. The automatic stay lasts until the case is discharged or dismissed.
If you want to include your mortgage loan in the discharge -- meaning that you want the debt wiped out -- and don't want the home, you can surrender it. You would indicate you don't want to keep the home on the Statement of Intention, a form you file as part of your Chapter 7 petition. On the statement, you tell the court that you want to surrender the property rather than keep it. Then the court includes your mortgage loan as part of your bankruptcy. When your bankruptcy is discharged, your loan is included and you're not responsible for paying the lender.
If you have little equity in your home and choose not to surrender it, you're responsible for paying the lender. The automatic stay will prevent the lender from filing a foreclosure action against you or completing a current action. However, the lender can ask the court for relief from the stay and foreclose on your home if you're behind on your payments. Your bankruptcy discharge will include the foreclosed mortgage, but not any new bills you ran up after you filed bankruptcy. You can't include new debts on your Chapter 7 bankruptcy after you've gone through the initial filing.
If you have significant equity in your home, you may lose your home in a Chapter 7 bankruptcy. In general, the bankruptcy trustee may be able to sell some of your assets and give the money to your creditors. Some property, including your home, is exempt from sale, but only up to a certain amount. The exemption amount for your residence, commonly called a homestead exemption, varies by state. If you have more equity in your home than the law allows for the exemption, the trustee can sell your home and distribute money from the sale to your creditors.
If you want to keep your home, you can reaffirm your mortgage. The reaffirmation is an agreement you enter with the lender that confirms you will honor the original loan agreement. Both you and the lender must agree to the reaffirmation. The court can't force you or the lender to reaffirm the debt. Once you sign the agreement, you have 60 days to change your mind and surrender or pay off your home instead. According to the website of Georgia attorney Terry Haygood, you'll have a better of chance of the lender agreeing to a reaffirmation if you're current in your payments and not involved in a foreclosure yet.
References & Resources
- The Law Office of Terry Haygood: Commonly Asked Bankruptcy Questions
- Minnesota Home Ownership Center: Bankruptcy and Foreclosure
- U.S. Bankruptcy Court: Statement of Intention
- Morse & Associates: The Basics for Surrendering a Home
- Findlaw: Debts That Remain After a Chapter 7 Discharge
- Shinbaum and Campbell, Attorneys at Law: Chapter 7 Reaffirmation of Debt or Chapter 13