Bankruptcy is a process created by federal law that provides relief for debtors, who can either eliminate their debts or repay their debts. A Chapter 7 "liquidation" is the process by which debtors are rid of many of their debts. A Chapter 13 "reorganization" is the process by which an individual prepares a plan for repayment of creditors.

During a bankruptcy proceeding, a debtor can lose some of his or her property. This is more likely to occur during a Chapter 7 proceeding because the debtor seeks a "fresh start." A debtor's mortgage is often his or her largest debt, and a debtor facing bankruptcy may very well be "behind" on mortgage payments. A mortgage is a lien on a home or property. Mortgages usually are not wiped out or "discharged" in bankruptcy. Not surprisingly, many debtors considering bankruptcy wonder if they will be able to keep their home.

Will filing for bankruptcy stop a foreclosure action?

Foreclosure is the legal process by which a lender or a mortgagee causes the property to be sold when the debtor or the mortgagor is unable to pay the mortgage debt. In a Chapter 13 bankruptcy proceeding, the debtor creates a plan of reorganization by which he will repay the debts over a period of time. Accordingly, a Chapter 13 debtor is unlikely to lose his home because the mortgage payments will, in theory, continue to be made. A Chapter 13 debtor must continue to make mortgage payments in order to keep the home.

In a Chapter 7 liquidation, however, a debtor could possibly lose his home, depending on certain factors. These factors include any "exemptions" provided by the law of the debtor's state. Another factor is the status of the mortgage or loan: if the payments are current, it is far less likely that a lender will begin foreclosure proceedings. If the loan is already in foreclosure, the lender is likely to continue the foreclosure proceedings. If the loan is delinquent but not in foreclosure, a debtor can attempt to make "reaffirmation" arrangements with the lender to catch up on overdue payments and to assure future payments. For the most part, lenders would rather receive payment than institute foreclosure proceedings.

A debtor that is already in foreclosure proceedings can indeed put a temporary stop to the foreclosure by filing for bankruptcy. The act of filing for bankruptcy creates an "automatic stay" to prevent lenders and other creditors from proceeding with or continuing legal action against a debtor. Some debtors facing foreclosure proceedings will file for bankruptcy in an effort to forestall foreclosure. An automatic stay is not a permanent protection against foreclosure because lenders are entitled to protect their interests. Put another way, a lender that has instituted foreclosure proceedings will probably be able to eventually continue with the proceedings.

What is a "homestead exemption" in bankruptcy?

Some of a Chapter 7 debtor's property can be sold by bankruptcy trustee to repay debts. This property is called "non-exempt" property. Property that cannot be sold to repay debts is called "exempt" property. The debtor keeps exempt property. Exemption laws vary from state to state, but generally, equity in a home or a car, tools of a trade, and some personal property are considered to be exempt. Equity in a home is the value of the home, less the costs of a sale and balances due on all liens and mortgages. Many debtors do not have a large amount of equity in their homes.

The federal Bankruptcy Code and the laws of some states provide for a "homestead exemption." This exemption represents the allowable amount of equity a debtor has in her home. If state law provides a $ 25,000 homestead exemption, a debtor in that state -- assuming that she has that amount of equity in her home -- can keep $ 25,000 "worth" of the home. If the unpaid balance on the mortgage is $ 200,000, the debtor could lose $175,000 "worth" of the home, which would likely necessitate a sale of the home. If the debtor can work out a repayment plan -- and adhere to it -- she will be able to keep the home.

Because each debtor's situation is different and because equity exemption amounts vary widely from state to state, there is no one single approach or formula that can be utilized. For example, Maryland has no homestead exemption. Florida, however, is known as a "debtor's haven" because the amount of equity protected by its homestead exemption law is unlimited. As a result, most lenders or creditors cannot "go after" the equity in a Florida home for repayment of debts.

As a general rule, the greater the difference between the value of a debtor's equity in a home and the amount of the mortgage debt, the greater the chances are that the home will be sold. The proceeds of the sale will be used to repay creditors. Lenders, however, usually prefer to receive payments on the mortgage rather than attempt to sell the home, which is why debtors in both Chapter 7 and Chapter 13 proceedings can arrange for repayment or a compromise of mortgage debt.

Does bankruptcy protect a renter from eviction proceedings?

If a debtor has been making rent payments on time, there is usually no reason that a landlord needs to know about a bankruptcy filing. If the debtor is not current on rent payments, a landlord can begin eviction proceedings, whether or not the debtor has filed for bankruptcy. While the automatic stay of bankruptcy can stall eviction proceedings, the stay is not permanent. A landlord can ask a court to "lift" the automatic stay. Courts usually grant these requests, which means that eviction proceedings resume.

Copyright 2006 LexisNexis, a division of Reed Elsevier Inc.