Filing Bankruptcy And Getting Your Free House

by Jay Fleischman, Esq.

March 21, 2012

Filing bankruptcy fre house

I’ve been meaning to tell you something for awhile now. It’s going to be a bitter pill to swallow, but it’s better that you know now rather than later.

Someone’s be spreading around this rumor, and it’s annoying as all get-out. Rather than buying a billboard in Times Square to tell you the truth, I figured I’d set it down here.

Spread it around – let’s try to kill this story for good.

File For Bankruptcy, Get A Free House!

You’re not getting a free house when you file for bankruptcy. No, I don’t care what your friend’s uncle’s brother told you – it ain’t gonna happen.

When you file for Chapter 7 bankruptcy, your personal liability for repayment of the mortgage is going to be discharged. That means you won’t be required to make payments to the mortgage company once your bankruptcy discharge is issued. You will, however, be required to make the payments if you want to keep the property.

The Truth

The mortgage company has what’s called a security interest in the property. That’s their legal way of making sure you pay the mortgage note; if you don’t pay, they get to foreclose and take back the house.

Once you file for bankruptcy and get a discharge, you get a choice – keep paying the mortgage or give back the property. The bank can get the property, but can’t collect against you. Attempting to do so is a violation of the bankruptcy discharge.

What You Need To Do

If you’re filing for Chapter 7 and the house is protected from the trustee, you need to keep making payments and keep your mortgage current. If you don’t, the bank is going to foreclose and take back the property. If that’s alright by you, just pack up your bags and move when the time comes.

If, however, you’re backed up on the mortgage or have too much equity to protect then file for Chapter 13. Under Chapter 13 you’ll be able to catch up the arrears. If you’ve got too much equity to protect in a Chapter 7 then you can structure a payment stream that will allow you to keep the house.

Either way, the house won’t be free. If it were, don’t you think everyone would be filing for bankruptcy if only for the free houses?

Image credit:  yoghaert

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

Last modified: December 20, 2012