Chapter 7 vs. Chapter 13
Individuals commonly file bankruptcy under Chapter 7 or Chapter 13 of the bankruptcy code. In Chapter 7 bankruptcy, a bankruptcy trustee will liquidate your non-exempt assets and use the money from the sale of those assets to pay your debts. Chapter 13 bankruptcy allows you to obtain court approval for a repayment plan in which you make payments on your debts over a three-to-five year period. Your Chapter 13 plan is also administered by a bankruptcy trustee, but your assets are not liquidated. At the completion of either type of bankruptcy case, most debtors receive a discharge – or elimination – of certain remaining unpaid debts.
Your Home under Chapter 13
Chapter 13 bankruptcy is designed to help you keep your home. Once you file under Chapter 13, you receive an automatic stay of collection efforts, including collection on your mortgage debt. Thus, your mortgage lender must stop all foreclosure efforts they may have started. The Chapter 13 repayment plan allows you to catch up on your past due mortgage payments over the period of the plan, and you are allowed to prioritize your debts as you see fit. This means that you can make higher payments on your mortgage than you make on other debts, if keeping your house is your goal. Additionally, Chapter 13 allows you to receive a discharge of an unsecured mortgage on your home.
Chapter 7 Exemptions
A Chapter 7 bankruptcy trustee only liquidates your non-exempt assets, so you are allowed to keep your exempt assets under either federal or state exemptions. Every state provides at least one exemption, called a homestead exemption, which enables you to keep your home, if you qualify. The bankruptcy court will look at the laws of the state where you lived for the two years before you filed for bankruptcy, but federal law places a cap on the allowable exemption. You are not allowed to exempt more than $125,000 of equity in a home you bought less than three years and four months before you filed bankruptcy. Even if you use your state’s homestead exemption, you must keep up your mortgage payments, insurance and property taxes to avoid losing your home. Otherwise, your mortgage lender can petition the court to remove the stay and allow foreclosure.
Reaffirming Your Mortgage
Once your Chapter 7 case is complete, many of your unpaid debts will be discharged, including your mortgage, and you are no longer personally liable for those debts. However, your lender’s lien on the home is not discharged, so the lender can foreclose on the property and you will lose your home. If you prefer to stay in your home and to keep making your mortgage payments, you can “reaffirm” the mortgage. A reaffirmation reinstates your personal liability for the mortgage debt and prevents the mortgage company from foreclosing.