A bank or loan company that holds a mortgage on your home or a lien on title to your car is called a “secured creditor.” They have collateral for their secured debts (your home or car) and they have a right to eventually enforce those rights against their collateral. The debts that you owe these secured creditors are discharged. This means that you have no personal liability to repay the creditor. But often debtors who are behind on a mortgage choose to file Chapter 13 in order to pay the defaulted mortgage payments back over time. This is possible in Chapter 13, and if your reorganization plan is confirmed, you will be able to pay your current mortgage payments after the petition and “cure” the defaulted amounts typically over 3 years.
But if you choose to file Chapter 7, you will get a short period time during which the automatic stay prevents any repossession or foreclosure. But when that period of time runs out (or when the creditor asks the Court to terminate the automatic stay earlier), the creditor will be allowed to complete a foreclosure or repossession and take back their collateral.
Sometimes people file Chapter 7 to eliminate credit card debts or medical bills, but they are up to date on their mortgage payments on their homes. In these cases, as long as the debtor stays current on their mortgage payments, they will continue to own their home and nothing will change. The only exception to this would be where a homeowner has a great deal of equity in their home (more than $75,000 to $175,000, depending on which homestead exemption applies). In these cases, there is risk that the Trustee will sell the home, pay the homestead proceeds to the debtor and pay the left over balance to creditors. This risk, if it applies to your situation, will require that you consider Chapter 13 and a plan that pays your creditors something over time, based on your net income after allowed expenses. Your attorney should understand these risks and will explain your options in detail.
Getting free advice about your financial situation and your debt options is possible. We meet with clients for free consultations virtually every day. Understanding your rights and getting expert advice and counseling is where you should start. Bankruptcy isn’t for everyone, but it’s a powerful remedy that will get you a fresh financial start and set you on your way to recover from the stress, creditor harassment and problems that occur when you have debts that you just can’t pay.