What Happens to Your Mortgage when Declaring Bankruptcy?

Declaring bankruptcy does not absolutely mean that you will lose your home. What really counts is whether you pay the mortgage or not while in bankruptcy.

Declaring Bankruptcy: Chapter 7

Declaring Chapter 7 bankruptcy usually results in a no-asset case, which means that debtors dont have to relinquish property to a trustee. The trustee is the court-appointed official responsible for handling the bankruptcy proceedings.

With Chapter 7 situations, the debtor gets to keep their home when no equity remains. However, if the house retains equity, the trustee will calculate whether your exemptions (types and values of necessary property that creditors cant take from you) tally up to or exceed the equity. If the exemptions do equal or exceed the equity, you will be able to keep your house. Remember, however, that you still are responsible for all mortgage payments and taxes.


Declaring Chapter 13 Bankruptcy

If the trustee determines that your home does have equity exceeding the amount of your exemptions, you can consider declaring Chapter 13 bankruptcy or relinquishing the house. Chapter 13 bankruptcy will put you on a payment plan and will prevent creditors from collecting while you are on the plan. You can remain in your home if you follow the payment plan, which, in some cases, is for less than what you owe.