When homeowners face the daunting prospect of foreclosure, understanding the defensive options available can potentially help them preserve their homes and financial stability. For example, two common types of bankruptcy, Chapter 7 and Chapter 13, offer different benefits and drawbacks in the context of foreclosure.
Although there are exceptions to this general rule, Chapter 7 might not be the best option for those concerned with foreclosure, although Chapter 13 could potentially provide a more viable solution.
Chapter 7
Chapter 7 bankruptcy can eliminate most unsecured debts that aren’t secured by collateral, in the way that auto and home loans are. However, it does not automatically provide a means to prevent foreclosure in the long term. In a Chapter 7 scenario, if a homeowner is behind on their mortgage payments, their bankruptcy filing should temporarily stop the foreclosure process due to the automatic stay—a legal provision that halts creditors from collecting debts temporarily. Nevertheless, this relief will be short-lived.
Since Chapter 7 does not allow for the restructuring of debts, it provides no mechanism to catch up on arrears. This makes it less suitable for homeowners who wish to retain their homes but are struggling with their mortgage payments.
Chapter 13
Unlike Chapter 7, Chapter 13 bankruptcy functions more like a reorganization of debt to be repaid over a several-year period. For homeowners, this reality provides an opportunity to catch up on overdue mortgage payments.
Chapter 13 also maintains the automatic stay for the duration of the bankruptcy plan, preventing lenders from foreclosing on the home as long as the homeowner continues to make their regular mortgage payments and pays off the arrears according to the plan. This can provide much-needed breathing room and a structured path to restoring financial health while keeping their home.
At the end of the day, for homeowners at risk of foreclosure who wish to keep their homes, Chapter 13 bankruptcy often offers a more appropriate and helpful approach compared to Chapter 7.
