How Will a Chapter 7 Bankruptcy Affect Foreclosure?

For many homeowners, unfortunately, bankruptcy and foreclosure go hand in hand. Often those who are experiencing foreclosures and the prospect of losing their homes are also facing the specter of bankruptcy because of the underlying financial difficulties that cause both.

One of the more common questions involves Chapter 7 bankruptcy and the foreclosure process. There are generally two types of bankruptcy available to individuals: Chapter 7 and Chapter 13. Each one has a different purpose and different guidelines and regulations.

Chapter 7 bankruptcy is also known as a 'straight' bankruptcy. It is the easiest bankruptcy to file. The intent of Chapter 7 is to allow an individual to liquidate assets in order to pay off debt that otherwise would be too much to pay. This is in contrast to reorganization, which is done in a Chapter 13. In a Chapter 7, a person is allowed to keep certain possessions, but there is a long list of possessions that are not protected in the bankruptcy. A mortgage loan is one of these.

Mortgage loans are not dischargeable in a Chapter 7 bankruptcy. This means that a homeowner going through this type of bankruptcy is still liable for his or her mortgage loan. In turn, this means that the lender can bring a foreclosure suit against the homeowner and pursue foreclosure, even after the homeowner declared bankruptcy. In other words, a Chapter 7 bankruptcy does not protect a homeowner from foreclosure.

Homeowners are also liable for property taxes and any other liens on the property, since these are not usually discharged in the bankruptcy.

Those interested in keeping their homes should look into filing a Chapter 13 bankruptcy, which could potentially allow one to keep his or her home (if certain requirements are met).