As I said on Monday, for clients needing foreclosure help, Chapter 7 bankruptcy generally buys them time to straighten out where they and their family will live. Unless you are current on your first mortgage, Chapter 7 will not help you save your home. However, if you are able to pass the bankruptcy means test, Chapter 7 will still provide some very attractive benefits, such as:
- Canceling most or all of your debt — A Chapter 7 bankruptcy will wipe out your unsecured debts. This can include credit card debt and medical bills, but it should be noted that some forms of unsecured debt are not dischargeable, such as student loans and child or spousal support. For your home, this means you are not responsible for the deficiency balance—the difference between what you owed and what the home sold for at foreclosure.
- Living rent-free and saving money for a few months — Most Chapter 7 cases last no longer than four months, but you and your family can stay in your house during this time. This allows you not only additional time to find somewhere else to live, but also allows you to save the money you would have put towards those bills or that mortgage and use it to secure a new home.
- Eliminating tax liability — Chapter 7 will exempt you from tax liability on your house, as property taxes go with the home, and the IRS cannot tax you on a discharged deficiency balance.
Chapter 7 can be extremely beneficial for clients who are prepared to give up their homes as a result of foreclosures. Clients wanting to save their homes, however, need to file Chapter 13 instead, and I will go over some of the advantages and requirements of that chapter on Friday.
