Chapter 7 Bankruptcy

• Chapter 7 bankruptcy involves a liquidation of all your non-exempt assets in order to pay back your creditors. This is a bankruptcy that many people use to give them a fresh start financially, discharging all qualified debts. If your equity in your home is less than the exemption that you are allowed for home equity, you can keep your home in a Chapter 7, but you will need to pay all of the mortgages that are secured by the home. These mortgages can not be eliminated in a Chapter 7.
  
  

Chapter 13 Bankruptcy

• A Chapter 13 bankruptcy allows you to work out your debts through a court-ordered repayment plan, which will probably last three to five years. During this time, the bankruptcy trustee distributes your payments to creditors, with secured creditors getting paid first. At the end of the repayment period, the court grants you a discharge of the remainder of most of your debt that remains. If you are interested in eliminating a second or third mortgage, you will need to file for a Chapter 13 bankruptcy.
  
  

Equity Position

• Equity position is key to your ability to eliminate second or third mortgages in a Chapter 13 bankruptcy. If you owe more money on your home than the value of the outstanding mortgages, you may qualify to eliminate liens. For example, if your home is worth $190,000, and you have a first mortgage with a balance of $200,000 and a second mortgage with a balance of $40,000, you are upside down on the second mortgage. The bankruptcy court may consider an upside-down second mortgage to be unsecured debt and eliminate the lien against your home. The $40,000 in debt is then repaid with your unsecured creditors in the repayment plan. You may only have to repay a very low amount of this debt, depending on the circumstances.
  
  

No Cram Down

• If you are upside down on your first mortgage, the bankruptcy court cannot reduce the balance of your first mortgage to the value of the home. This can be done in a Chapter 13 with cars and some other property and is known as a "cram down." The court has no power to do this with a mortgage, and you will have to pay the entire balance of your first mortgage if you wish to keep your home.