There are a lot of misconceptions about bankruptcy, and it is absolutely crucial that a debtor separates fiction from reality before deciding which chapter to file or whether to file at all.
The most common questions I get are Will I lose my house if I bankruptcy? or Will I lose my car if I file bankruptcy? While it is possible a debtor would lose those items in bankruptcy, it is important to note that you will almost always not lose those items because you filed bankruptcy.
The only scenario that you can lose an item because you filed bankruptcy is when you file a Chapter 7 bankruptcy and lose an asset (i.e., your house or your car) to your Chapter 7 trustee through a liquidation of the bankruptcy estate. It is imperative the debtor understands that any asset with negative equity is not going to be taken by their Chapter 7 trustee. The trustee has no interest in selling the debtors $300,000 house if the debtors mortgage on it is worth $325,000 or the debtors $10,000 car that has a $14,000 note attached to it.
The attorneys role prior to the case is to evaluate the likelihood that the Chapter 7 trustee would find an asset of sufficient value to liquidate, and if so, inquire from the debtor whether he/she wants to risk a liquidation of that asset. If the debtor does not want to take that risk but still wishes to file bankruptcy, the debtor should then consider Chapter 13 bankruptcy. Unlike in a Chapter 7, the debtor must make a monthly payment to creditors in a Chapter 13. However, also unlike a Chapter 7, the debtor cannot involuntarily be forced to surrender any property.
Therefore, if the debtor has a $300,000 home with a $50,000 mortgage, the debtor is likely to see that property liquidated in a Chapter 7 by the trustee (note: this will depend on the debtors applicable exemptions). If the debtor absolutely does not want to lose the house, the debtor would file a Chapter 13 to retain the house, while in exchange repaying at least a portion of its debts to its creditors.
While we just discussed when the trustee liquidates the debtors property, the next question to answer is Will my lender take my house if I file bankruptcy? The answer to that is no, with a caveat. The bank will not take back your house through foreclosure (and your car lender will not take back your car) because you filed bankruptcy. They are prevented from doing that because the debtor gets The Automatic Stay when the bankruptcy is filed.
The lender could take back the car or the house during the bankruptcy if they get the bankruptcy courts permission through a Motion to Lift Stay. And why would the court grant a motion to lift stay so that the creditor can get at the debtors collateral? A motion to lift stay is granted when the debtor is not current on its payments (when in a Chapter 7) or not making its post bankruptcy filing date payments (when in a Chapter 13).
Therefore, it is not the act of filing bankruptcy itself that would cost the debtor use of its collateral to its creditor, but rather the non-payment on the collateral, which could have taken place partially or entirely before the bankruptcy was filed. The bankruptcy will actually keep the debtor in possession of the collateral longer than if the debtor had not filed bankruptcy, which at worst gives the debtor more time to work out other options to potentially retain the house or car.
However, as I always tell my clients who are in arrears with their house or their car, there is no chapter of the bankruptcy code that lets you use someone else’s collateral forever without paying them.