I thought my mortgage and car payment was not part of the bankruptcy?!


One of the most difficult and annoying things for people to understand when they file a chapter 7 bankruptcy case is that while they may be filing bankruptcy on the credit card debt, medical debt or some other personal loan, and not the mortgage or car loan, the bankruptcy law does not make that distinction. In other words, if you are filing a chapter 7 bankruptcy case your discharge will wipe out not just the credit card and medical debt, but also the mortgage and car loan. And that’s a good thing just so you know! When your case concludes virtually all of your debt on your credit report (exception being student loans) will state the words “included/discharged in bankruptcy” and will show a zero balance. That includes the mortgage and the car loan(s).

Does that mean that you can keep your house or car without paying the mortgage or making the car payments? No, of course not. Otherwise, I would be filing for bankruptcy myself tomorrow morning. If you want to keep your car or house you have to keep making the payments after bankruptcy. However, if for whatever reason you do not want to keep the house/car then at any time you can choose –so long as you do not sign a Reaffirmation Agreement- to stop paying for the house and/or car. At that point the bank can foreclose on the house or repossess the car, but they cannot come after you personally. This is an advantage that people outside of bankruptcy do not have. Another huge advantage is the fact that your $300,000 mortgage or $20,000 car loan is now being reported on your credit report as zero debt being owed. That does wonders for your debt to income ratio and ultimately your credit score. Nothing will make your credit score ascend faster than having 0 debt! That means you get to eat your cake and keep it too. As in, you get to keep the house or car even though the debt is not reported any longer on the credit report as would be the case had you not filed for bankruptcy.

As far as why the mortgage/car loan is showing “bankruptcy status” and why your statements are indicating zero owed the moment you file your bankruptcy case? The answer is as follows:  When you file your bankruptcy case all creditors are entitled to receive notice of your bankruptcy filing- whether you want to bankruptcy them or not, and whether you are behind or not on your payments is irrelevant.  Every bank that you owe money to is entitled to get notice of your filing. Moreover, in light of the automatic stay (the legal principle that states “I am in bankruptcy so do not even think about trying to collect money from me”) the creditors/banks send statements in such fashion and take the position that you “technically” do not owe them any money. Again, the reality is that if you want to keep the property you have to continue paying for it after you file your case. In this sense the bankruptcy has changed nothing. You pay you keep, you do not they take!