What happens to your mortgage when you file a chapter 7 bankruptcy? Depending on whether or not you intend to keep the property, there are three things that can happen.
Collections Efforts are Stayed
A "stay" is a delay. Once bankruptcy is filed, collections efforts by banks and other creditors is stayed. So the homeowner filing for bankruptcy receives a temporary reprieve, providing breathing room while the bankruptcy process is worked through.
If You Don't Want to Keep the Home
Bankruptcy "discharges," or eliminates debt. In Chapter 7, the debtor's unsecured assets may be liquidated, or taken and sold, for the benefit of creditors: the creditors are paid as much as possible, then the remaining balance of any debts are discharged.
It works slightly differently with secured property, such as homes with a mortgage. The lender still has the right to take the property unless it the debt is affirmed (see below), but that's all they can do--the balance of the debt will be discharged. So if a homeowner filing bankruptcy doesn't want the house, she can let the bank have it.
If you Want to Keep the Home
If you want to keep the home, you have to "affirm" the debt: you agree to keep paying the debt and to remain obligated on it. Therefore, the debt is not discharged. It's good news, bad news: you keep the home, but you also keep the mortgage. (The court will look at the payment to make sure it's something you can afford; if it's not, the court may disallow the affirmation.)
How Chapter 7 Can Reduce Mortgage Payments
Lenders don't want your home--if they wanted real estate, they'd buy it. Therefore, lenders may be willing to accept less than full payment of a mortgage as an alternative to receiving nothing except a house they don't want anyway. When a debt is affirmed, it doesn't have to be for the full value--if the lender agrees to take less, that's acceptable. Therefore, using the leverage provided by bankruptcy, it may be possible to get the lender to reduce the mortgage in order to get you to affirm it. (Of course, they still have to be getting more than they'd get through foreclosure.)
When to Talk to an Attorney
Negotiating with lenders is not easy. Attorneys who work in bankruptcy and with debtors, however, have experience doing it. A good attorney in your corner maximizes the chance of getting the bank to reduce your mortgage payment.
