Filing Chapter 7 bankruptcy in the midst of letting go of your home can be a smart combination.
A Chapter 7 “straight bankruptcy” adds the following advantages while surrendering your home to your mortgage lender: gives you more control over the timing of surrender, avoids continuing liability on house-related debts, gives you the leverage and peace of mind of an attorney looking out for you, and gives you a full fresh start when you really need it.
Chapter 13—the three to five year partial payment plan—consists of an entire toolbox full of different tools to help people hang onto their homes. But that may not be what you need. After getting informed about how those tools would work (or not work) in your situation, you may decide that it’s best for you to walk away from your home. If so, here are some advantages of doing that in conjunction with filing a Chapter 7 bankruptcy:
- Have more control over when you leave:
If you have a foreclosure sale date scheduled, or a foreclosure lawsuit pending, usually you would have no say about when you have to leave. You could even be forcibly evicted by county sheriff deputies. However, if you file a Chapter 7 bankruptcy case, that will delay the foreclosure sale or lawsuit, at least for a few weeks, and possibly for a matter of months. That alone could save you a couple thousand dollars in rent. Also, after a bankruptcy filing, your mortgage lender may well be willing to negotiate a departure date convenient to you, in return for avoiding their need to rack up a lot of attorney fees. As part of the deal you may be willing to sign over your title through a “deed in lieu of foreclosure,” with no risk of further liability since your bankruptcy case is discharging any remaining debt.
- Avoid house-related debt following you:
Depending on your situation, and on your local state laws, after surrendering a house without bankruptcy you risk being saddled with debts coming at you from
various directions. Sometimes you could continue being liable on the first mortgage. If you have a second mortgage and are surrendering the house to the first mortgage holder, you would usually continue owing the full balance on the second mortgage. You could also be liable on other debts related to the home—such as unpaid utilities, contractor liens, income tax liens, or homeowner association dues. Many of these debts would be discharged if you filed a bankruptcy. Those that would not—like certain income taxes—you would have a practical way of taking care of them, instead of just waiting for such creditors to catch up with you.
- Have an attorney in your corner:
Fair or unfair, your mortgage lender will likely treat you better when it knows you are being advised and represented by an attorney (assuming that you would be filing your Chapter 7 case through an attorney). You will have the peace of mind that comes from knowing your rights, understanding what will happen when, and having an advocate available to get directly involved as needed.
- Get a fresh financial start instead of a continuation of a vicious cycle:
If you are surrendering your house and reducing your monthly cost of keeping a roof over your head, you may be tempted to think you don’t need a bankruptcy (in spite of the reasons cite above). Perhaps you don’t. But if you have fallen so far behind on you mortgage that it’s gotten to the point of foreclosure, the odds are that you need more help than giving up your house alone will achieve. You at least owe it to yourself to work through a sensible after-move budget, and then get legal advice about your realistic options. Emotionally, there may well be wisdom in giving yourself a fresh start so that you (and your family) can better weather the challenges of the move.