Using Bankruptcy to Save Your Home

Summary:  A Chapter 7 bankruptcy can help save a family home in limited circumstances. Generally the elimination of other debt such as credit card bills and car loans is the biggest benefit to a Chapter 7. Chapter 13 is used more often to save a home because it allows you to pay any mortgage arrears (delinquency) over a 3 to 5 year period and it reduces the payments you must make to unsecured creditors, such as credit cards. At the end of the Chapter 13 plan, your unsecured debts are discharged (eliminated.)

Using Bankruptcy to Save Your Colorado Home

Federal law allows individuals to obtain a fresh start and get back to being a productive citizen by using a bankruptcy filing to start over. This is similar to the IRS laws which provide for the reduction of tax debts so that people can become productive taxpayers again.

Most homeowners can use bankruptcy to obtain temporary or permanent relief from foreclosure and/or execution of a court judgment or tax lien. They also get the relief from other bills by eliminating many unsecured debts such as credit cards, car loans, medical debts, etc. Although sometimes a Chapter 7 filing can help you, most often homes are saved with a Chapter 13 filing.

Most Chapter 13 reorganization filings are for the purpose of defending a home from foreclosure and eliminating other debts. The purpose of a Chapter 13 plan of reorganization is to allow the honest debtor breathing room to address their financial situation and to finish the plan current and up-to-date on their mortgage.

The Automatic Bankruptcy Stay

The filing of a bankruptcy automatically prevents essentially all creditor actions against the debtor and the debtor’s property, including foreclosure and even all collection calls.

Chapter 7 Liquidation of Debts

Some people can get relief by filing a Chapter 7 bankruptcy. Because Chapter 7 instantly eliminates credit card debt and other unsecured debt. Car loans can be eliminated if your turn the car back to the lender. Some car loans can be reduced to the value of the car.

In a chapter 7, the filing freezes the debtor’s assets as of the date of the filing and protects exempt assets from the reach of creditors. A chapter 7 could protect a home if the amount of equity in the home is less than the homestead exemption and the owner can pay the mortgage arrears. The trustee cannot sell the home is the amount of equity is less than the homestead exemption. Some of the help in a chapter 7 comes from the relief from other debts, such as credit card and car debts. In most cases, the debtor keeps most or all of their property in a Chapter 7. However, in many cases, chapter 7 does not help with the eventual prevention of the foreclosure, but it can delay it and it will prevent any deficiency judgment if the trustee sells it. In some cases, a Chapter 7 will also allow the owner to keep the value of the homestead exemption (generally now $60,000) if the trustee sells the home. A chapter 7 should not be filed if the only objective is to delay a foreclosure.

Chapter 13 Reorganization

If you cannot qualify for a Chapter 7, then sometimes a Chapter 13 bankruptcy will allow you to keep your Colorado home.  In a Chapter 13, you have to pay money into the court (the trustee) every month for 3 to 5 years.  Sometimes it is worth it in order to keep your home.