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Crucial Question: Can You File a Chapter 7 “Straight Bankruptcy” If You Want to Keep Your Home But Are Behind on Mortgage Payments?

Yes, Chapter 7 may make sense if discharging your other debts will enable you to catch up on your back mortgage payments quickly enough.


The Limited Help of Chapter 7

Chapter 7 does not directly help you with your mortgage if you are behind on payments. It protects your home from foreclosure for only a very short time. It may allow you to get rid of a judgment lien, but provides no direct help with income tax liens, back property taxes, child support liens, construction liens, or virtually any other kind of lien on your home.

Chapter 7 helps you deal with these home-related obligations only indirectly, by discharging (legally getting rid of) all or most of your other debts so that you can put all your financial effort into bringing current your mortgage and any other debts with a lien against your house.

If that’s enough help, Chapter 7 may do enough for you.

How to Know Whether This Limited Help is Enough

Commonsensically, you need to know two things:

1) How much time will your mortgage lender give you to catch up on the back payments?

2) How much less will you have to pay to your other creditors once you file a Chapter 7 bankruptcy?

The answer to the first question will tell you how much you would need to pay each month (beyond your regular monthly mortgage payment) to catch up in time on your mortgage. The general tendency in a Chapter 7 case is for mortgage lenders to give you up to about a year to catch up. But your attorney will likely know from past experience with your lender and/or from contacting it how much time it would give you.

The answer to the second question will tell you how much you would be able to pay each month for that catch-up payment, after accounting for your necessary expenses. It will tell you whether you will have enough each month to pay what you need to pay to satisfy the lender within the time you’re given. Your attorney will usually be able to tell you which debts will be discharged (legally written off) and which will not.

A creditor might unexpectedly challenge the discharge of its debt, so there are judgment calls involved in answering this second question. Usually, however, you will be able to predict your post-bankruptcy budget quite well, assuming that your income is consistent and predictable.

So, if you will have enough money available to catch up on your mortgage payments within the timeframe your lender allow, then Chapter 7 will give you the help you need.

Even So, Check Out Chapter 13 Because of Its Advantages

Using the quickest and cheapest option for solving your problem makes sense. So if Chapter 7 gives you the help you need for keeping your home (and that’s also the best way to deal with the rest of your financial picture), use it instead of the much longer and usually more expensive Chapter 13 option.

But Chapter 13 provides so many benefits that Chapter 7 does not—some of which can save some homeowners tens of thousands or even hundreds of thousands of dollars—that you should definitely find out what a Chapter 13 would do for you. You might find out that Chapter 13 is even better for you, even if Chapter 7 might have been adequate.

We will give you a list of the Chapter 13 benefits that can make it worthwhile in our next blog post. So please come back here in a couple days for that.


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