In Chapter 7, the bankruptcy court takes your money and sells off your assets -- except those exempted by law -- and uses the proceeds to pay off your creditors. If you want more of your money to go to your mortgage, you have to make advance payments on the mortgage debt well in advance of filing. Chapter 7 can wipe out your mortgage debt, but it doesn't remove the lender's lien on your house. If you don't pay the mortgage, your lender can foreclose, even after bankruptcy.
Set a date for filing bankruptcy. It has to be more than 90 days out, because paying extra money to one creditor in the 90 days before you file could give other creditors grounds to challenge your bankruptcy case. If your lender is an "insider" -- someone you have close business or personal ties to -- you need to wait a year to file after you've made a "preferential" payment.
Calculate how much you can afford to pay and on what schedule. You can pay a little extra every month, as your paychecks come in, or make one big payment. Allow enough time for the last check to clear before the deadline for preferential payments kicks in.
File your bankruptcy paperwork once enough time has elapsed, and don't omit any information. If you paid an extra $1,000 on the mortgage within the 90-day window for example, your bankruptcy trustee can make the lender pay it back, but if you hide the payment, the court can throw out your case.
- Research your state law and find out what protection it gives your equity -- the value of the house above the mortgage -- in Chapter 7. New Jersey doesn't offer any protection, whereas Florida protects houses no matter what they're worth. Most states fall between those extremes. If you have $50,000 in equity and your state only protects $5,000, the trustee can sell the house and divide $45,000 among your creditors. Prepaying doesn't change that.
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