Given a choice between losing their house and bankruptcy, many people choose bankruptcy. By filing for bankruptcy, homeowners can put an automatic stay on foreclosure proceedings against them and postpone the foreclosure sale possibly for months, Goldbach Law Group states. In Chapter 7 bankruptcy, a court may sell off some of your assets to pay your debts, but the remaining debts–with exceptions such as child support–are wiped out. In Chapter 13, you pay off as much debt as possible over several years, but some debt, such as your mortgage, must be paid in full.
Decide whether to file for Chapter 7 or Chapter 13 bankruptcy protection. To qualify for Chapter 7, Goldbach Law Group states, you must either have income below your state median or prove that you can’t possibly pay all your debts. Otherwise, you must file Chapter 13. Goldbach Law Group recommends that you look at how much equity–property value less the mortgage balance–you have in your house before filing Chapter 7. Each state exempts some home equity from being taken in Chapter 7, but if you have substantial equity above the exemption, the court could sell your house to pay your creditors. That can’t happen in Chapter 13.
Wait as long as you can before filing. Each state has a time line for what happens after a lender records a notice of default. In California, for example, the lender has to wait three months before scheduling a sale, then three more weeks before the sale can take place. Bankruptcy doesn’t stop the time line; it simply stops the lender from taking action when the time for the sale arrives. If you filed early in the three-month process, your bankruptcy could be wrapped up by the sale date. If you file just a week or two before the sale, you may gain a much longer time to stay in your house.
File a bankruptcy petition in U.S. District Court. The federal courts website has downloadable forms and an instruction manual available online. You can also use the website to find the court that covers your district.
Make plans for what happens after bankruptcy is completed. Under Chapter 13, you still owe your mortgage debt. Under Chapter 7, you can wipe out your mortgage debt, but your lender still has a lien–a legal claim on the house–that it can use to foreclose if you don’t pay. Goldbach Law Group recommends that you keep paying your mortgage if you’re still current. If delinquent, use the extra time and the money saved from other debts to clear the back payments and work out a deal with your lender.