For most homeowners, bankruptcy is certainly not their first choice to save their home from foreclosure. This is for a very good reason, as the credit effects can be quite serious and its results are generally poor, at best. Many of those who file bankruptcy to get out of foreclosure find themselves right back in the foreclosure process within in months of entering bankruptcy. Putting off losing the home is obviously not the reason most homeowners file, as they will then be stuck with both a bankruptcy and a foreclosure on their credit.
Chapter 7 Bankruptcy
In any event, homeowners facing foreclosure can not include the house in a Chapter 7 bankruptcy. Chapter 7 is only for unsecured debt, such as credit cards, store cards, personal loans, and the like. The mortgage is secured by the property, so it would not be dischargeable under Chapter 7. The clause in the mortgage paperwork that keeps it from being included in a Chapter 7 case is that it states the mortgage loan is secured by the underlying collateral, the property itself. Chapter 7 does not discharge secured debt, so this combination excludes the mortgage and this type of bankruptcy from having anything to do with each other.
Chapter 7 bankruptcy may, however, serve a purpose in freeing up income that the homeowners could use to keep on top of their mortgage payment. Keeping a roof on top of their heads is much more important than financing a new television or furniture, and credit card companies who are unwilling to work with homeowners in financial trouble will have to bear the costs of their poor lending decisions. Discharging most of these types of debts can significantly free up income, which can immediately be used to pay down the arrears on the mortgage or establish a repayment plan or other workout program. Homeowners with a debt-to-income ratio too high will not qualify for these bank workout programs, so discharging some of this high-interest, unsecured debt through Chapter 7 may be a reasonable path to getting the mortgage back on track.
Chapter 13 Bankruptcy
Homeowners who want to file bankruptcy to stop foreclosure can include the house in a Chapter 13 filing, which is a reorganization of the debt with a payment plan mandated by the courts. But if the house is already too expensive, then agreeing to an expensive payment plan would not make a whole lot of sense. In Chapter 13, the mortgage payments might very well go up, because the homeowners have to pay the regular monthly mortgage, as well as a portion of the amount that they are in default. Falling behind on this type of bankruptcy almost always results in the house going back into foreclosure and sold at a county sheriff sale.
Especially if the homeowners fall behind on the Chapter 13 plan, they will be in serious danger of losing the home very quickly. Bankruptcy does not actually stop foreclosure — it only puts the process on hold and gives the owners protection under the courts to pay back what they have fallen behind. Thus, if the payments are not made as agreed, the bank will request that the courts lift the stay and allow them to proceed with the foreclosure process. And the lender will be able to proceed as if the bankruptcy never occurred, starting up right from where they left off. This can often result in a sheriff sale being scheduled very quickly, within a matter of weeks.
Filing bankruptcy to stop foreclosure is a decision that homeowners need to consider very carefully, and even potentially consult with a lawyer for approved legal advice. The only real way to get rid of the mortgage and no longer worry about the property is find some way to sell the house, give a deed in lieu of foreclosure, or have it be foreclosed on by the bank. The county sheriff sale will eliminate the mortgage liens and transfer ownership of the property. The homeowners will have to deal with a foreclosure on their credit for 7-10 years, though. There are no easy decisions during the foreclosure process, of course, but the possibility of facing foreclosure and bankruptcy on the same house should be avoided.