There are two types of bankruptcy Chapter 7 and Chapter 13. You cannot file a Chapter 7 bankruptcy for your home loan, it is reserved for unsecured debt such as credit cards, personal loans, and store cards. You may use Chapter 7 bankruptcy to free up money so that you can repay back payments on your home or establish a repayment plan with your mortgage company. Should you allow your home to be foreclosed on, the lender may still come after you for a “deficiency balance”. This balance is what is owed to the lender after your home is auctioned at the courthouse. Following the auction, a Chapter 7 bankruptcy can be filed to clear you of this obligation. However, you will have both a bankruptcy and foreclosure in your credit history, which will make life very ugly for the first four years after filing. A foreclosure will stay on your credit report for 7-10 years and lower your credit score between 200 – 280 points.



Under Chapter 13, you reorganized your debt and consent to a reasonable repayment plan mandated by the courts. You cannot file Chapter 13 unless your income is great enough to pay all priority and secured debts, and 25% of your unsecured debt over a 5-year period. Additionally, your mortgage may rise because you will have to continue to pay the lender in addition to any amount that you missed during the proceedings or leading up to the proceedings. If you fall behind on your mortgage payments after securing a Chapter 13, then the mortgage company will ask the court to lift the stay and proceed with a foreclosure and you may find your home on the auction block in a matter of weeks. A homeowner can file an individual bankruptcy in only their name and it will not affect their spouse's credit as long as their spouse did not sign the mortgage.

Do not wait until the last minute to file bankruptcy. Some states require that you complete credit counseling 7-8 days before filing your case with the court, so time is of the essence if you have already received your Notice of Default.

One last note: be wary of anyone who aggressively solicits you by mail or phone regarding bankruptcy. You cannot be assured they will advise you honestly if their primary goal is to get you to file bankruptcy. You should also look through the yellow pages for a smaller firm to handle your bankruptcy, as big city firms might let your case fall through the cracks because they have so many clients. For more information on bankruptcy and foreclosure, please consult an attorney and financial advisor who can advise to your specific situation.

Don't worry there is a way out of your situation, just make sure you are open to creative solutions and be prepared to work with your lender.