Owning a home is a dream that most Americans hold and view as a mark of financial success. Many would do almost anything to keep a home if threats loomed from outside. The foreclosure crisis, spurred by the 2007 recession, brought this threat to the doorstep of many homes as banks sent out foreclosure notices after homeowners defaulted on their loans following a job loss and/or a significant decline in their life savings. In an effort to stave off banks taking away their homes, many homeowners filed for bankruptcy hoping to renegotiate a lower monthly payment.

While the rate of foreclosures has returned to more normal levels for most the U.S., one segment of the population, African-Americans, is struggling to recover financial stability. A recent article in Frost Illustrated looks at the story of one woman battling to keep the only home she has ever known. While the article focuses on one woman and her use of both Chapter 7 and 13 of the Bankruptcy Code to erase debt and restructure payment terms on her home mortgage, it also provides a general outline of the reduction of wealth by race and ethnicity in the U.S., and its effects on home ownership.  Given the large investment required to purchase and own a home, an overview of what happens to this asset in bankruptcy will follow below.

Chapter 7

As a basic refresher, Chapter 7 is liquidation plan designed to wipe out most debts owed by the bankruptcy petitioner. It may require selling certain property to pay off creditors, but it is generally seen as a way to get most of a person’s debts forgiven. Determining if a petitioner needs to sell property comes down to whether the property is labeled as exempt or non-exempt. Exempt property is never sold, and the petitioner can keep the property throughout the bankruptcy process. Non-exempt property, on the other hand, typically requires the petitioner to surrender the property to the bankruptcy trustee for sale or to pay its cash value.

When it comes to home mortgages, there are two key legal rights a bank holds. First, there is the loan given to the homebuyer, and then there is a lien, which is an interest in the property the banks retain until the loan is fully paid. Chapter 7 bankruptcy erases a petitioner’s obligation to pay the mortgage loan, but the bank still has the right to enforce the lien on the property. Thus, even though the loan obligation is gone, unless the mortgage continues to be paid, the bank will likely enforce the lien and sell the property at auction.

Chapter 13

Chapter 13 does not wipe out the petitioner’s debt, but instead allows the petitioner to keep his/her property by offering a repayment plan to creditors that will pay off outstanding balances. Depending on what the petitioner can afford, some creditors will be paid in full, some will receive partial payment, and some will receive nothing. For home mortgages, the petitioner must outline how he/she plans to pay the mortgage in the repayment plan, and the automatic stay issued in all bankruptcy petitions stop will stop any foreclosure efforts until the repayment plan is approved by the bankruptcy and implemented by the petitioner.

Consult a Bankruptcy Lawyer

Facing the possible loss of your home is a devastating situation, but before you give up completely, it is worthwhile to speak with a bankruptcy attorney who can advise you on what the options are to stop foreclosure and keep your home. Christopher L. Arrington is an attorney representing clients in the Indianapolis area in bankruptcy proceedings. Contact him today to find out how bankruptcy may be able to help you.