Individuals filing bankruptcy usually choose one of two forms, Chapter 7 or Chapter 13. One of the advantages of Chapter 13 is that you may be able to save your house from foreclosure. If you want to surrender your house instead, that may be possible as well.
Your House in Chapter 13
In Chapter 7, the bankruptcy court sells off your assets, except those protected under law, and gives the proceeds to your creditors. In Chapter 13, you may be able to keep your assets. Instead of selling them, you spend three or five years, depending on your income, paying all your disposable income to creditors. At the end of that time, most of your remaining debts are discharged.
You can't file Chapter 13 unless you meet the qualifications. The major qualification is how much you owe. Debts secured by property, such as mortgages, must be less than $1.149 million at time of writing. Unsecured debts must be under $383,175.
Preventing Foreclosure ... Or Not
Creditors have to stop foreclosures, lawsuits and other attempts to collect money from you while you're going through bankruptcy. If you're behind on the mortgage, you can make up the deficiency as part of the Chapter 13 payment plan. That gives you three to five years to get current. Your mortgage is a higher priority debt than credit cards or hospital bills, so you'll be able to pay the lender ahead of other creditors.
Sometimes, however, it's not practical to take that route. This is the case if:
•You don't have enough income for a payment plan that includes current and past mortgage payments. If you can't pay the mortgage, the lender can ask the judge for a go-ahead to foreclose.
•Your home's value has dropped and you don't think it's worth keeping. Chapter 13 lets you avoid some mortgage debt on an underwater property, but not on your personal home.
•You want to save money on property taxes and homeowners' association fees.
Surrendering the House
The simplest way to give up your house is with a statement of intent. You use these statements in bankruptcy for secured debts. The statement tells the court trustee for your case whether you intend to keep the property or give it up. Unfortunately, the trustee doesn't have to go along with this. If the property is worth less than the debt tied to it, she may abandon the house, returning it to your ownership.
The fallback option is to include the surrender in your Chapter 13 payment plan. State in the plan that once the court approves it, ownership vests in the lender. You have to phrase this so the transfer doesn't require a new deed, so you'll probably need a lawyer's help. Next, record the court order approving the plan with the registry of deeds that holds your title.
Some courts will not allow you to include the surrender in the payment plan. Even if the court approves, the Nolo legal website says, the bank may not accept it. This is a relatively new legal tactic at time of writing and it's unclear how effective it is.