Most people call a Chapter 7 bankruptcy a “liquidation” bankruptcy. This is because, in many instances, the debtor must sell off (or liquidate) his or her assets in order to pay off creditors as much as possible. It is unlikely that liquidation will completely erase debt, but the courts require paying off as much as possible.
Many worry about losing their home as a consequence of filing Chapter 7 bankruptcy. In fact, one of the most common questions people ask when filing Chapter 7 bankruptcy is if they will be able to retain their home after the process. Like many questions related to bankruptcy, it depends: in this case, it largely depends on the amount of equity you have in your home according to FindLaw.
What is equity?
In the majority of cases, equity is the difference between the current market value of your home and any home equity loans and your mortgage. In the majority of bankruptcy cases, debtors have negative equity in their houses.
If you have negative equity in your house, it is likely that the courts will consider the property exempt from bankruptcy. This means that you will be able to retain ownership of the home as long as you can pay the mortgage.
What if I cannot pay the mortgage?
In some instances, the liquidation aspect of Chapter 7 bankruptcy is a blessing. Filing bankruptcy and losing your home in the process is one of the only legal ways you can “walk away” from a mortgage with no consequences. In the event that you cannot afford your mortgage, filing a Chapter 7 bankruptcy and losing your home may be a positive for you.