Bankruptcy as an Alternative to Foreclosure Explained

Author: Ian C. Langtree - Writer/Editor for Disabled World (DW)
Published: 28 Apr 2011 - Updated: 2 Sep 2026
Publication Type: Informative

Table of Contents:
Synopsis - Definition - Overview - FAQs - Insights, Updates - Related Content

Synopsis

This article discusses the potential of bankruptcy as an alternative to foreclosure for homeowners facing financial difficulties, emphasizing that while both options impact credit reports, bankruptcy may offer a less damaging path. It outlines how filing for bankruptcy, specifically Chapter 7 or Chapter 13, can help individuals retain their homes and manage debts, making it particularly relevant for seniors and individuals with disabilities who may face unique financial challenges. By presenting practical solutions and legal insights, this informative resource serves as a valuable guide for those navigating foreclosure risks and seeking ways to protect their homes and financial futures.

At a Glance

• 1 - Both bankruptcy and foreclosure stay on a credit report for seven years. However, foreclosure typically causes far greater long-term damage to future borrowing ability.
• 2 - Arizona law lets Chapter 7 filers exempt up to 150,000 dollars of equity in a primary residence under the homestead exemption. Filers must generally keep making mortgage payments to retain the home.
• 3 - Chapter 13 creates a court-approved payment plan lasting three to five years that folds in missed mortgage payments. This gives homeowners a structured way to catch up and stay current.
• 4 - Homeowners who are underwater may be able to strip a wholly unsecured second mortgage through Chapter 13. The lien can only be removed after every repayment plan payment is completed.

Topic Definition

Bankruptcy as an Alternative to Foreclosure

Using bankruptcy as an alternative to foreclosure refers to the legal strategy of filing under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code to help a homeowner stop or delay the loss of a home when mortgage payments have become unaffordable. Rather than simply waiting for a lender to seize and sell the property, a homeowner can use the bankruptcy process to reorganize debts, catch up on overdue mortgage payments through a court-supervised repayment plan, protect a portion of home equity under a homestead exemption, and in some cases eliminate a wholly unsecured second mortgage. Because a completed bankruptcy often allows a person to begin rebuilding credit sooner than a foreclosure does, many people facing financial hardship - including seniors and individuals with disabilities - view it as a less damaging path toward keeping their home and stabilizing their finances.

Overview

Considering Bankruptcy as an Alternative to Foreclosure: Exploring Your Options

Foreclosure rates in the U.S. have skyrocketed since the housing market crash. Last year, more than 2.5 million homeowners received foreclosure notices, a 2.5 percent increase over the previous year and more than 23 percent increase over foreclosures in 2008. Arizona has remained one of the states hardest hit, with Phoenix ranking second only to Las Vegas as the city with the highest foreclosure rate in the nation. If you're one of these homeowners, you may be asking yourself what you can do with mortgage loans in bankruptcy.

For some people, foreclosure may be the best way to rid themselves of mortgages they can no longer afford, but for others, foreclosure is not the only option. For those who want to keep their homes but cannot afford it, filing for bankruptcy may be a reasonable solution with less damaging financial consequences than other courses of action, such as sitting at home waiting for the sheriff to show up on your doorstep.

While both foreclosure and bankruptcy will remain on your credit report for seven years, a foreclosure can have a much harsher impact on your ability to secure credit in the future. In comparison, those who file for bankruptcy may begin receiving offers for credit cards within one to two years of completing bankruptcy - because creditors know you're now debt-free - and you may be eligible for a new mortgage within as little as four years, depending, of course, on your individual circumstances.

Exempting Your Home in Chapter 7 Bankruptcy

What follows is a simplistic analysis of home exemptions in chapter 7 and chapter 13 bankruptcies. Your individual circumstances will definitely play a role in what you ultimately decide to do.

If you want to keep your home and do not have much equity in it, chapter 7 bankruptcy may be your best bet. Under Arizona law, homeowners who file for chapter 7 are allowed to exempt up to $150,000 in equity in their primary residence under the homestead exemption. (You must, however, generally continue to make mortgage payments if you wish to keep your home in chapter 7 bankruptcy.)

Equity is the difference between what the home is worth and what is owed on the home. For example, if you own a home worth $350,000, but you still owe $300,000, then you have $50,000 in equity in the home, putting you well within the homestead exemption.

However, if you have more equity in the house than the exemption amount, chapter 7 may not be the right fit for you. In a chapter 7 bankruptcy, the court will assign a trustee to collect any non-exempt property you own to sell it to repay some of your debts. This includes any equity in your house above the exemption amount.

For example, if your house is worth $350,000 and you owe the bank $100,000, then you have $250,000 in equity in the home - well above the exemption amount. In this example, the bankruptcy trustee can force a sale of your home and take any amount from the sale over $150,000 to repay your creditors.

In cases such as this, the better option may be to file for chapter 13 bankruptcy.

Catching Up on Your Mortgage in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is another way you may be able to keep your home out of foreclosure. In chapter 13 bankruptcy, you will work with the bankruptcy court and trustee to create a payment plan to pay off a portion of your secured debts within three to five years. This repayment plan can include missed mortgage payments, giving you an opportunity to make up late payments and get current on your mortgage.

The catch about chapter 13 bankruptcy, however, is that it only works if you have enough disposable income to make the payments every month, on time, throughout the entire three to five years of your repayment plan (this is why chapter 13 is also known as "wage-earners" bankruptcy, though why that is remains somewhat a mystery - it's not like those who file for chapter 7 don't have jobs). If you can do this, then unsecured debt, like credit cards and medical bills, will be discharged after you have successfully completed your chapter 13 repayment plan.

If you are unable to keep up with the repayment plan, then you may have the option of converting your bankruptcy to a chapter 7 filing; however, the conversion will not save your house from foreclosure if you own more than $150,000 in equity in the home, or if you cannot otherwise make your mortgage payments. If you do not convert to chapter 7 and do not complete the repayment plan, including keeping current on your mortgage, then the lender can take steps to foreclose on your house.

Stripping a Second Mortgage

If you are like thousands of other homeowners who owe more on their mortgage than the home is worth (you're "underwater"), you may be able to eliminate, or "strip," a second mortgage through chapter 13 bankruptcy.

In some cases, you can strip your second mortgage so long as it is wholly unsecured. This means that the value of your house must be equal to or less than the amount owed on your first mortgage. For example, if you owe $200,000 on your first mortgage and $50,000 on your second mortgage, but your home is valued at $198,000, there is not enough value in your house to secure the second mortgage. As a result, you are eligible to strip the second mortgage off what you owe.

A second or subsequent lien on your property can only be stripped once you have completed the chapter 13 repayment plan. This means making all of the payments for the entire repayment period, which includes staying current on your first mortgage.

The Next Step: Contact a Bankruptcy Attorney

If you have received a home foreclosure notice or have fallen behind on your mortgage payments, talk to a bankruptcy lawyer before you do anything else. Whether you want to keep your home or are ready to let it go, learn about selecting a bankruptcy attorney who can explain your legal options and help you get back on track.

Frequently Asked Questions

Does filing for bankruptcy automatically stop a foreclosure sale

Filing for bankruptcy triggers an automatic stay that temporarily halts most collection actions, including a scheduled foreclosure sale. The pause gives a homeowner time to pursue a repayment plan or other options, though it does not permanently cancel the debt.

What is the difference between Chapter 7 and Chapter 13 bankruptcy

Chapter 7 liquidates non-exempt assets to discharge qualifying debts and is often faster. Chapter 13 sets up a three to five year repayment plan that lets a filer catch up on missed mortgage payments and keep the home.

Can I keep my car if I file for bankruptcy to avoid foreclosure

You may be able to keep a vehicle if its equity falls within an available exemption and you stay current on any loan tied to it. The rules vary by state and by the chapter you file under.

How long after bankruptcy can I qualify for a new mortgage

Waiting periods depend on the loan program and your rebuilt credit, and can range from about two to four years after a discharge. Consistent on time payments and lower debt improve approval odds.

Do I need an attorney to file bankruptcy against foreclosure

You are legally allowed to file without a lawyer, but the process involves strict deadlines, exemption rules, and paperwork. Consulting a bankruptcy attorney helps you avoid costly mistakes and understand your options.

Will bankruptcy affect my spouse if the mortgage is in both names

A joint mortgage means both borrowers remain responsible for the debt unless it is addressed in the filing. A spouse who does not file may still see effects on shared accounts and joint credit.

Can bankruptcy remove property taxes or association dues owed on my home

Certain recent property taxes and ongoing association dues are often treated as priority or non-dischargeable obligations. A Chapter 13 plan may let you repay past due amounts over time while keeping the home.

What documents should I gather before meeting a bankruptcy attorney

Bring recent pay records, tax returns, mortgage statements, a list of debts and creditors, and any foreclosure notices you have received. Having a clear picture of income and expenses helps the attorney assess your options quickly.

Insights, Analysis, and Developments

Editorial Note: Navigating the complexities of foreclosure and bankruptcy can be daunting, especially for vulnerable populations like seniors and individuals with disabilities. It is essential for affected individuals to explore all available options and seek professional advice to make informed decisions. Understanding the nuances of these financial processes can make a significant difference in preserving one's home and overall financial well-being.

Author Credentials: Ian is the founder and Editor-in-Chief of Disabled World, a leading resource for news and information on disability issues. With a global perspective shaped by years of travel and lived experience, Ian is a committed proponent of the Social Model of Disability, a transformative framework developed by disabled activists in the 1970s that emphasizes dismantling societal barriers rather than focusing solely on individual impairments. His work reflects a deep commitment to disability rights, accessibility, and social inclusion. To learn more about Ian's background, expertise, and accomplishments, visit his full biography.