Filing for bankruptcy can sometimes help homeowners in foreclosure, but it also comes with potential downsides and important distinctions between Chapter 7 and Chapter 13. Here’s a breakdown of the pros and cons of each and some factors to consider when deciding which type might be better for a specific situation.

Chapter 7 Bankruptcy

Chapter 7 is often called "liquidation bankruptcy" and typically involves selling non-exempt assets to pay creditors. It can provide a fast discharge of many unsecured debts, which can be helpful for those wanting to start fresh, but it has specific pitfalls for homeowners.

Pros:

• Automatic Stay: Filing for Chapter 7 puts an automatic stay in place, which temporarily halts foreclosure proceedings. This can give the homeowner some breathing room, even if only for a few months.
• Debt Discharge: Many unsecured debts (like credit card debt) are discharged, allowing homeowners to focus on paying secured debts, including a mortgage.

Cons:

• Limited Time to Stop Foreclosure: The automatic stay is often temporary in Chapter 7 cases, and unless you can catch up on missed mortgage payments, the lender can request the stay to be lifted and proceed with foreclosure.
• No Opportunity to Catch Up on Payments: Chapter 7 doesn’t allow homeowners to reorganize their debts or make up missed payments over time. If a homeowner is behind on their mortgage and unable to pay it in full, they could still lose the home.
• Possibility of Losing Non-Exempt Assets: If the homeowner has significant equity in the home that is above state exemption limits, the trustee could sell the property to pay creditors.

Best For: Homeowners without much equity in their home who are looking to discharge unsecured debts but have already decided they might let the home go.

Chapter 13 Bankruptcy

Chapter 13 is known as "reorganization bankruptcy" and is generally designed to help people keep their assets by restructuring debt.

Pros:

• Automatic Stay: Like Chapter 7, Chapter 13 also triggers an automatic stay on foreclosure.
• Opportunity to Catch Up on Payments: Chapter 13 allows homeowners to create a repayment plan, which can stretch up to five years, to catch up on past-due mortgage payments while staying current on future payments.
• Ability to Keep Home: Chapter 13 is typically a better choice for those wanting to keep their home, as it provides a realistic structure for repaying debts over time.
• Possibility to Strip Off Second Mortgages: If a homeowner’s first mortgage is more than the home’s current value, some second or junior mortgages can be “stripped” and reclassified as unsecured debts, which may eventually be discharged.

Cons:

• Lengthy Process: Chapter 13 can be a commitment, lasting three to five years. Homeowners must stay current on their payment plan and mortgage to retain protection.
• Complexity and Cost: Chapter 13 cases tend to be more complex and often require higher attorney fees and filing costs.
• Risk of Dismissal: If the homeowner misses payments during the repayment period, the court may dismiss the case, which would allow the lender to restart foreclosure proceedings.

Best For: Homeowners who have a steady income and want to keep their home, catch up on missed payments, and maintain control over their debt repayment.

Which Option is Better for Homeowners in Foreclosure?

• If the goal is to keep the home: Chapter 13 is usually the better option, as it allows for catching up on missed mortgage payments. However, it requires regular income and the ability to stick to a repayment plan for up to five years.
• If the goal is to discharge debts quickly: Chapter 7 could be more appropriate for homeowners who are okay with potentially losing the home and need a fast discharge of unsecured debt.

Key Considerations

• Equity in the Home: If there is substantial home equity, Chapter 7 may risk the home being sold.
• Income: Chapter 13 requires a regular income source to keep up with the repayment plan.
• Foreclosure Stage: In advanced foreclosure stages, either chapter might only delay the inevitable, but Chapter 13 provides a structured way to repay debt and keep the home if there’s a feasible plan.

Both types have implications that can affect a homeowner’s credit, long-term financial health, and likelihood of keeping the property. Consulting a bankruptcy attorney is essential to make the most informed decision. If you would like to learn more about the saving your home intead of pursuing a bankrtupcy (or after a failed bankruptcy), an experienced attorney can help you navigate the process. At The Law Center, we are a team of specialists that are passionate about the foreclosure process from start to finish and helping homeowners at the highest level. Our staff and attorneys approach each client and each property as a new challenge, one that requires thorough analysis, zealous representation, and thoughtful strategy. It’s your home, let The Law Center help you defend it.

Call us now and speak with a foreclosure expert on how you can make the foreclosure process work for you -- not against you. (312) 600-8815

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