How Can I File Chapter 7 Bankruptcy and Keep My House?

In some circumstances, filing for Chapter 7 bankruptcy can be beneficial if you're facing a foreclosure. But to keep your house in a Chapter 7 bankruptcy, you must be able to meet two requirements: Your payments must be current, and you must be able to protect all your home equity when filing.

Even if you don't meet these requirements, you still might want to consider Chapter 7 bankruptcy. If losing your home is inevitable, filing for Chapter 7 can help you remain in your house for two to three additional months and wipe out your responsibility to pay a deficiency balance if the home sells for less than you owe. Also, Chapter 7 can be a good way to deal with various debts because, unlike Chapter 13, qualifying debts, such as credit card debts, medical bills, and most money judgments arising from lawsuits, are eliminated without the need to pay into a repayment plan.

However, if you're behind in mortgage payments and want to keep your home, a Chapter 7 bankruptcy doesn't provide the type of help available in a Chapter 13 bankruptcy. While a Chapter 7 can delay a foreclosure temporarily, it won't block it permanently because you can't make up the missed payments. People behind on a mortgage who want to keep a house should consider filing for Chapter 13 instead.

Understanding Chapter 7 Bankruptcy and Foreclosure

Again, you can file for Chapter 7 bankruptcy and keep your house (possibly preventing it from going into foreclosure) if both of the following are true:

• You're current on your mortgage payments when you file.
• Your equity in the house is protected by the exemption laws available to you in your state.

If you're not current on your payments, Chapter 7 bankruptcy will be only a temporary remedy unless you can modify your loan, which isn't guaranteed. And if you can't protect all of your home's equity with a "bankruptcy exemption," the law that sets forth the property each filer is entitled to keep, the Chapter 7 trustee will sell the property and distribute the proceeds to your creditors.

The bottom line? If you satisfy both requirements, your house will be safe. Otherwise, the lender will be able to proceed with a foreclosure, probably within a couple of months. Still, if losing the home is inevitable, filing for Chapter 7 can help you remain in your house for some additional time and wipe out your responsibility to pay a deficiency judgment if the home sells at a foreclosure sale for less than you owe, as well as other dischargeable debts.

Eliminating Other Debts Can Help You Stay Current on Your Mortgage

Suppose you're current on your payments but having trouble keeping up with the payments because you have a lot of other debts, like credit card and medical bills. Filing for Chapter 7 could be helpful. Except for a few categories of debt, you can eliminate much of your unsecured debt, such as credit card debt, personal loans, medical debts, money judgments, and car repossession deficiencies, in about four months. You can even stop paying them before you file. But be sure that you qualify first—it can be hard to catch up once you fall behind.

Once your unsecured debt load is eliminated or greatly reduced, you will have a much better chance of paying your mortgage. Of course, Chapter 7 bankruptcy isn't for everyone. You must qualify to file, and if you have good credit, it will take a major hit. However, most people who file for bankruptcy already have bad credit, so filing won't make a huge difference. Interestingly enough, with some work, there's a good chance your credit scores will recover reasonably quickly after bankruptcy.

The Role of Equity in Determining if You Can Keep Your Home

In every Chapter 7 case, the bankruptcy trustee looks for property to sell for the benefit of the creditors. The trustee will only be interested in selling the property that would produce money for the creditors. In other words, property that you own outright or in which you have equity. The trustee will subtract the following from the property's value:

• the amount the trustee must pay a secured lender (your mortgage or car loan)
• the exemption amount the trustee would need to refund to you, and
• the costs to sell the property.

If a reasonable amount of money would remain, the trustee will go forward with the property sale. Selling property worth less than the amount owed to a secured lender or fully protected by an exemption wouldn't net any money for creditors. In that case, the trustee wouldn't sell it, and you'd get to keep it (you'd still have to pay any outstanding loans against it).

Most states let you keep at least some home equity when you go through Chapter 7 bankruptcy. Protection for home equity varies dramatically from state to state. Some states allow you to choose between the state and federal list—you'd pick the list that's most advantageous to you. (Each state has a set of bankruptcy exemptions. Federal law also provides an exemption set.) While some states require you to use the state exemptions, others let you choose either its set of exemptions or the federal system. But you can't mix and match the two. And in California, you can choose between two state lists. If you haven't resided for at least two years in the state where you file for bankruptcy, however, you must use the exemptions for the state where you resided previously.

If your equity is less than the protected amount and you're current on your payment, you should be able to keep your house when you go through Chapter 7 bankruptcy.

However, if you can't protect all of your home equity with a bankruptcy exemption, you risk losing the house to the trustee.

To find out how much your state protects or what other property is protected under your state's exemption laws, visit Nolo's Bankruptcy Exemptions by State area. However, these amounts could change. Contact a local bankruptcy attorney for current exemption amounts.

Steps to File Chapter 7 Bankruptcy and Protect Your House

Chapter 7 bankruptcy is a straightforward process consisting of six steps:

Step 1: Before filing, complete a mandatory credit counseling course by phone or online.

Step 2: File the official bankruptcy forms listing all your property and creditors and providing information about your financial transactions during the previous two years (fillable forms are available at www.uscourts.gov/forms/bankruptcy-forms).

Step 3: Mail the bankruptcy trustee appointed to the case a copy of your most recently filed income tax return (or file it with the court, depending on your court's requirements), plus any other documents the trustee asks for—usually bank statements and paycheck stubs.

Step 4: About 30 days after you file, attend a creditors' meeting. The creditors' meeting occurs in a small hearing room and is conducted by the trustee. Creditors seldom appear. At this meeting, you must answer any questions the trustee has about the information in your papers and provide other information the trustee thinks is relevant. A typical meeting lasts five minutes or less. You are not required to have a lawyer represent you. Still, you'll have to answer the trustee's questions about matters reasonably related to your financial situation.

Step 5: No later than 60 days after the creditors' meeting, you must attend mandatory budget counseling (by phone or online) and file a simple form telling the court that you have completed it. You'll attach a certificate of completion from the counseling agency.

Step 6: Wait until the court sends you a written discharge of your debts. That will come about 60 to 75 days after the creditors' meeting. During that period, creditors can, but seldom do, object to a discharge (cancellation) of your debt. The trustee arranges for you to turn over nonexempt property if you have any.

Again, to keep your house, you must be current on your mortgage payments when you file, and your equity in the house must be protected by the exemption laws available to you in your state.

Mortgage Modification and Bankruptcy Considerations

Getting a loan modification isn't guaranteed, and it isn't even typical in Chapter 7 bankruptcy, so if you need to modify your loan to afford the payments (and perhaps bring the loan current) it's best to complete the process before filing for bankruptcy. Talk to a HUD-approved housing counselor before you file. The counselor can guide you through the modification process and help you understand your options.

This point is important, so we'll say it again—if your plan is to keep your house, complete the modification and ensure your mortgage payments are current before filing for bankruptcy. Also, make sure you're able to protect all home equity with a bankruptcy exemption. If you can't bring your loan payments current before filing, consider Chapter 13 bankruptcy, which would allow you to keep your house by spreading out your missed payments over several years.

While it's possible to modify your loan after filing for bankruptcy, it comes with significant risks. Most homeowners find this level of uncertainty uncomfortable. A lawyer can also advise you about the modification process and the most effective strategies to protect your home.

How the Automatic Stay Temporarily Halts Foreclosure

Whether or not you plan to give up your house, you can buy some time just by filing for bankruptcy. Filing a bankruptcy petition triggers an automatic "stay" order from the federal bankruptcy court. This stay halts all collection efforts by creditors, including mortgage lenders. So, foreclosure actions must stop, at least for a while.

It usually takes about four months to complete a Chapter 7 bankruptcy case. However, there's no guarantee the foreclosure will remain stayed during the entire bankruptcy.

Motion for Relief From Stay

The stay prohibits creditors from pursuing any collection activities without first obtaining explicit permission from the bankruptcy court. If you're behind on mortgage payments, a foreclosing lender can file a motion asking the court to lift the stay to allow the lender to continue with foreclosure proceedings—and most are granted. (Although rarely done, you can beat the motion by bringing the loan current. Another possibility would be to stop the motion by alleging a foreclosure irregularity, such as the proposed foreclosure is illegal in some way or the lender didn't comply with state foreclosure requirements. However, using a Chapter 7 bankruptcy forum to fight a foreclosure isn't advised. Talk to a lawyer about challenging the issue in state court if you have a solid case against the lender that would allow you to keep your home.)

Lenders commonly file motions for relief from the stay because they're relatively inexpensive and likely to be successful. If the court lifts the stay, the lender can resume foreclosure. So, you might not get much of a delay, perhaps two or three months. A foreclosing lender who doesn't file the motion can continue with the foreclosure after the Chapter 7 case ends.

Using Chapter 7 to Delay a Foreclosure Sale in Good Faith

While the foreclosure delay is probably only temporary (again, the lender can ask for relief from the stay), it can provide you with some breathing room to figure out your options and make informed decisions about your finances. However, filing for Chapter 7 bankruptcy is generally a bad idea if you don't have much debt to discharge and your primary reason for filing is just to get some extra time in your house. Courts frown on filers who use bankruptcy for tactical purposes, finding that they aren't acting in "good faith," a determination that could come with negative consequences (although this issue comes up more in Chapter 13).

Alternatives to Chapter 7 for Avoiding Foreclosure

While filing for Chapter 7 bankruptcy is one way to deal with foreclosure, there are other options to consider, such as Chapter 13 bankruptcy or resolving your mortgage payment problems by getting a loan modification (especially if you don't have a lot of other debts).

Talk to a Lawyer About Bankruptcy and Foreclosure

To find out if filing for bankruptcy might be right for your situation, talk to a bankruptcy lawyer. It's also a good idea to talk to a HUD-approved counselor, especially if you want to keep your house. For more information about foreclosure, including how the process works in your state, talk to a foreclosure attorney.

Get More Information About Foreclosure and Bankruptcy

If you're having trouble making your mortgage payments or are in jeopardy of foreclosure, The Foreclosure Survival Guide by Attorneys Amy Loftsgordon and Cara O'Neill (Nolo) will give you the practical information you need. Nolo also offers books covering filing for bankruptcy, including How to File for Chapter 7 Bankruptcy and Chapter 13 Bankruptcy, both by Cara O'Neill (Nolo).