Can I File Bankruptcy & Get Rid of My Mortgage?
Bankruptcy can offer a fresh start, financially speaking, freeing you of many burdensome debts. Chapter 7 bankruptcy --- the so-called "liquidation bankruptcy" --- will remove most of your unsecured debt; but there are certain debts, including your primary mortgage, which it cannot erase.
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Secured and Unsecured Debt
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Credit card balances are unsecured debt. The credit card company did not lend you the money based on any collateral or the equity in any property. These types of debts can generally be discharged in a Chapter 7 filing. Secured debt includes loans that are taken out against a particular piece of property, for instance a mortgage on your home or car loan on your vehicle. These types of debts are not discharged in bankruptcy.
Homestead Exemption
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If you want to keep your home in a Chapter 7 filing, you must check your state's homestead exemption. This shows you the maximum amount of equity in your property that can be exempted from your bankruptcy filing. If the equity in your home far exceeds the state homestead exemption, you may be in danger of losing the house to pay back your creditors. Your primary mortgage company would receive back the loan amount on the house, and then your other creditors would split the excess.
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Reaffirming Debt
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If your equity falls below the homestead exemption, there are two other things you must do in order to hold on to your home through a bankruptcy. You must remain current on your mortgage payments, and you must "reaffirm" the mortgage debt --- that is, you must tell the bankruptcy court that you wish to keep this loan and not have it paid back by selling the house.
Second Mortgages
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It is sometimes possible to remove second and third mortgages in a bankruptcy filing. If the equity in your home has fallen far enough that it no longer covers the amount of your secondary mortgages, you can ask the court to strip them from the property. They can then be considered as unsecured loans and can potentially be discharged as part of your filing. You have to have a professional appraisal of your home and follow court procedures exactly in order to be able to accomplish this.
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