Can I Declare Bankruptcy to Get Out of My Mortgage?
- If you are already in foreclosure, filing a bankruptcy petition can offer you some time to resolve your situation. Upon receipt of a bankruptcy petition, the court will issue an injunction to all of your creditors preventing them from continuing or initiating a foreclosure action against you. This injunction, known as the automatic stay, applies to all types of collection actions, including calls, letters and wage garnishments. The stay lasts until the end of your case, so if you file bankruptcy, you can stop paying your mortgage until the resolution of your Chapter 7 bankruptcy or the initiation of your Chapter 13 payment plan.
- Chapter 7 bankruptcy could very well get you out of the responsibility of paying your mortgage. However, it cannot generally protect your home from foreclosure. You can include your mortgage in your Chapter 7 bankruptcy discharge, which frees you from your obligation to pay that debt back. However, the bank holding your mortgage has a secured interest in your home. That gives your creditor the right to seize your home through foreclosure to pay off the secured lien against it. Chapter 7 can eliminate your liability to pay your mortgage, but if you want to keep your house, you must still continue to make payments.
- Chapter 13 is a different animal altogether when it comes to your a home mortgage. Chapter 13 is structured as a payback plan, where you have to pay off all of your secured debt and as much of your unsecured debt, such as credit card debt, as the court deems you can afford. Since your home mortgage is a secured debt, you must pay off your full mortgage in your Chapter 13 plan if you want to keep your home. If you intend to walk away from your home, you do not have to make payments and must allow your creditor to foreclose.
- One of the confusing aspects of a Chapter 7 bankruptcy is the distinction between what the court can seize and what your creditors can seize. In Chapter 7 bankruptcy, your state grants you a specific exemption for your home, and you can protect a home up to that value from liquidation by the court. However, this is entirely separate from the right of your lender to foreclose if you do not keep up your mortgage payments.