How are Mortgage, Credit Cards, and Other Debts Treated in Bankruptcy?

As soon as you file for bankruptcy, all the property you owe at filing time becomes the property of the bankruptcy estate. This means the bankruptcy trustee will take control of this property for purposes of satisfying the creditors. However, there are certain property and assets which are either

excluded or exempted, which means you'll be able to keep them. Ultimately determining which property to keep requires a detailed analysis of your situation with the help of a good lawyer.

Treatment of Debts Under Chapter 7

Chapter 7 is the most frequently selected kind of individual bankruptcy because it allows debtors to discharge most unsecured debts. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy.

Treatment of Debts Under Chapter 13

The main advantage of Chapter 13 is that it enables debtors to retain assets that would otherwise be liquidated by a Chapter 7. As a general rule, Chapter 13 is the wise choice for those with debts not dischargeable in Chapter 7; for those in default on mortgages or car payments; for those possessing more property than can be exempted in Chapter 7; and for those owing taxes and other debts not dischargeable in Chapter 7.

Credit Card Debt

Credit card issuers sometimes challenge the discharge of their debt in Chapter 7 by claiming that the debt was incurred by fraud, and should therefore be excluded from the discharge. Credit card debt may be "non-dischargeable" in bankruptcy if the submitted credit card application was fraudulent or, far more commonly, if the card was used without intent to repay.

Home Loans

What happens to a house is a function of several issues, but as a rule of thumb, if the equity in the house is exempt and you'll be able to continue making the mortgage payments, you can keep the house. Without nonexempt equity in your home the trustee won't attempt to sell it to payback creditors. If, on the other hand, there is a significant amount of nonexempt equity, consider Chapter 13.

Although bankruptcy discharges eliminate your personal mortgage liability, they don't disturb the lien. This means that once your bankruptcy is completed, the mortgage lender on your home still has its rights in the property — including the right to foreclose if you breach the loan agreement.

Almost without exception, the secured creditor wants you to keep the house and keep paying on the loan. The lender is not looking for an excuse to foreclose. If you're behind on your payments and it makes sense to keep the house, consider Chapter 13.

Vehicle Repossession

Bankruptcy offers little protection against automobile financers because most agreements allow creditors to repossess your car even if you're only a day late making a payment. No notice on their part is required. That said, repossession is an expensive option, so the creditor may be willing to work out a payment plan with you. Alternatively, turning the vehicle over to the creditor may save you money in the long run.

Creditors who are pursuing repossession do have to follow a few rules. For example, the car may be towed from in front of your house, but the creditor may not break into your garage to get your car. Also, if a creditor loaned you money to buy a car, then the creditor can only repossess the car. The creditor cannot keep other items that might be in the car when it is repossessed.

Other property — including furniture, electronics, etc. — that you are paying for over time can also be repossessed in accordance with contractual terms, but not without permission from the bankruptcy court.