Keep house with Chapter 13 bankruptcy


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Dear Bankruptcy Adviser,
If you own a home, can you file bankruptcy to avoid foreclosure? In other words, file and keep your home?
— Eileen

Dear Eileen,
Yes, you can. It’s called Chapter 13 bankruptcy, also known as personal reorganization bankruptcy. This is different from Chapter 7 bankruptcy (liquidation bankruptcy). Each has different merits. In Chapter 7, you liquidate your assets, distribute the cash to creditors and have your debt erased relatively quickly — usually within 4 months. In Chapter 13, you keep your house, but it takes 3 to 5 years of faithfully conforming to a payment plan before getting your fresh start. In that 3- to 5-year plan, you will be able to close in on your delinquent mortgage balance.

If you have a house and you are behind on payments, then you will almost definitely want to go with Chapter 13. When you file, it is important to include all credit card debt, personal loan debt, student loans and your auto loan. DO NOT keep a credit card for “emergencies.” That could jeopardize your ability to obtain bankruptcy protection under the law, and moreover, you won’t be able to refile. Be honest about ALL of your debt.

Once you’ve done that, the key is to make your monthly payment as low as possible. Even if this means accepting a full 5-year payment plan, having a low monthly payment is critical to maximizing your chances of success. A low payment means you’re more likely to be able to demonstrate to the court that you have the capability to make such a payment, which means it’s more likely you’ll be granted Chapter 13 bankruptcy, which means you’ll keep your house.

After you complete your 3- to 5-year plan, the company that financed your mortgage and your auto loan will have received the money owed; unsecured creditors such as a credit card issuer or a department store card may not have received anything. But it doesn’t matter — execute your Chapter 13 bankruptcy plan and all debt balances are eliminated. Once that happens, your financial life begins all over again.

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