Chapter 7 bankruptcies provide for the total discharge and liquidation of debts. Because of this powerful debt relief tool, individuals are only able to file a Chapter 7 bankruptcy once every eight years. In a Chapter 7 bankruptcy, people may list their home and mortgage as one of the debts that they are seeking to discharge. If an individual chooses not to include their house in a Chapter 7 bankruptcy, then they are still intending to keep the house, and must stay current on the payments on the house while the other debts are being discharged.
Many people think that if they can discharge their other debts, then they will have enough available cash to get caught up on their house payments and stay current. More often than not, they are wrong. Even if the house is not included in a Chapter 7 bankruptcy, the stay granted by the filing of the bankruptcy will apply to the mortgage and the foreclosure action. If the homeowner can then bring the mortgage current, then the foreclosure action is halted.
However, most of the time the homeowner is unable to bring or keep the mortgage current and the bank then files a motion for relief of stay. Chapter 7 can be a valuable tool. A homeowner who realizes that they are going to lose their house may be best served by waiting until after the foreclosure action is completed or until after the short sale is done, before using the Chapter 7 bankruptcy to wipe out any deficiency judgment that may remain.