People experiencing trouble paying their mortgage fear having their homes taken through foreclosure. While this is a legitimate concern, not all lenders are quick to foreclose. Further, there are differences between states that dictate how the foreclosure process is managed. Depending on a person’s financial situation there may be ways to prevent foreclosure in bankruptcy, however not all bankruptcy cases can prevent a foreclosure.
Chapter 7 Considerations
Since a mortgage is a secured debt, the lender does have the legal right to foreclose and repossess the home once it enters default. In most cases, mortgage debts are best managed in Chapter 13 cases in which the debtor makes payments to resolve mortgage debts over a period of three to five years. When attempting to resolve mortgage debts in Chapter 7, the debtor is leaving the fate of their home up to the court.
Debtors are not guaranteed protection of their home in a Chapter 7 case. The court often reviews the debtor’s financial situation to determine if the home’s equity is sufficient. If the home’s equity exceeds the amount that can be protected by law, the home may be allowed into foreclosure in order to resolve the mortgage debt. However, some states have generous bankruptcy exemption laws that may protect the home regardless of how much equity it holds.
For homes that may not qualify for exemption or protection in bankruptcy, there may be another way to resolve mortgage debts in Chapter 7 and keep the home. Second mortgages and, in some cases, underwater mortgages may be eligible for a partial debt discharge in Chapter 7. In such cases, a portion of the mortgage debt will be eliminated in Chapter 7, while the debtor repays the remaining amount through Chapter 13.