Mortgage Default

• Most homeowners who file for Chapter 7 bankruptcy are in default on their mortgage loans. This means the homeowner is behind on the monthly mortgage payments. The homeowner's default gives the mortgage lender the right to foreclose on the home. Foreclosure results in the home being sold and taken away from the homeowner. Either the mortgage lender or a third party purchaser at the foreclosure auction will end up with title to the home.
  
  

Foreclosure in Bankruptcy

• When a homeowner files for Chapter 7 bankruptcy, the law provides temporary protection from foreclosure. Bankruptcy law imposes an "automatic stay" that temporarily delays all foreclosure procedures. To get around the automatic stay, a mortgage lender must apply for and receive permission from the bankruptcy judge assigned to the homeowner's case. Generally, a judge will allow a lender to foreclose if the borrower is in default at the time the borrower files Chapter 7 bankruptcy and it does not appear the borrower will be able to bring the mortgage current within the reasonably foreseeable future. Accordingly, while Chapter 7 will temporarily delay foreclosure, a homeowner in default on the mortgage will still likely lose the home to foreclosure even after filing Chapter 7 bankruptcy.
  
  

Sale by the Trustee

• Filing for Chapter 7 bankruptcy also creates the risk that a home may be repossessed and sold by the bankruptcy trustee. A bankruptcy trustee is an administrative officer appointed to each bankruptcy case. Generally, the trustee is a local attorney specializing in bankruptcy law. The trustee's job is to raise money to pay off creditors by selling the debtor's property. The trustee has authority to sell any part of the debtor's property that is not specifically exempt under state or federal law. Most of the time, this puts a home at potential risk of being repossessed and sold by the trustee.
  
  

Exemptions

• Every state has enacted its own rules regarding what property, including homes, is exempt from liquidation in bankruptcy. Every state provides at least some protection for homes, but the amount of exempt equity varies from one state to another. If a homeowner has enough equity in a home to exceed a state's exemption amount, then the trustee can cause the home to be repossessed and sold. However, if the homeowner's equity is less than the exemption amount, then the trustee cannot repossess or sell the home. State exemptions for homes in Chapter 7 range from $5,000 in equity to unlimited equity as of 2011.