The filing of a bankruptcy petition, either Chapter 7 or Chapter 13, stops collection activity and any foreclosure activity, on a first, second, or third mortgage and any home equity lines of credit.   That does not mean, however, that the debtor automatically get to keep the home.   The creditor might successfully get relief from the bankruptcy stay.   Under current bankruptcy law, the court is powerless to alter the terms of a first mortgage on a primary home.    However, certain arrangements may be possible:  1) Under Chapter 7, a debtor may be able to keep his home and still get her unsecured debts (such as credit cards, hospital bills, utility bills, etc.) discharged.  In order to get the benefit of this arrangement, the Debtor must sign a reaffirmation agreement and must be CURRENT ON THE HOME PAYMENTS.  Of course, if the debtor does not want to keep the home, or is behind and cannot pay, the debtor can surrender the home to the mortgage company.   The bankruptcy discharge will relieve the debtor of paying any further obligation to pay mortgage notes, past or present.   2)  Under Chapter 13,  the debtor still may be able to keep the house even if  the debtor is behind on the notes.   In this case the debtor must qualify (under the “means” income test) to show enough income to enter into a plan (three-to-five years) to pay the arrearage.   A Chapter 13 plan that is approved by the court and complied with by the debtor will prevent foreclosure.

Home Equity lines which are set up as first mortgages on a debtor’s primary home are treated the same as other first mortgages.   However, second and third mortgages, or Home Equity Lines operating as second or third mortgages, may be treated completely differently.   If the value of the debtor’s home sinks below the value of the first mortgage, (no equity), then the second and third mortgage liens may be “stripped” out and the related debt treated as unsecured.  The stripping, however,  is only available in a Chapter 13, not a Chapter 7. 

 If  debtor is a co-signer, co-maker or guarantor  for a loan with debtor’s children, friends, spouse or debtor’s business,  debtor is liable to pay the debt if the primary debtor does not pay.   If the primary debtor  cannot pay and files for bankruptcy protection under Chapter 7,  collection activity will stop for the primary debtor, but not for the co-signer.   In other words, creditors can go around the bankruptcy proceedings and come after the co-signer personally.   If either the debtor or the primary debtor files a Chapter 13 bankruptcy petition,  the automatic stay of the bankruptcy court will protect both the debtor and the co-signer from further activity by the creditors.  Again, however, under Chapter 7,  the co-signer or guarantor does not  get the protection of the automatic stay and can be pursued by the creditor immediately.

 If the co-signer used the equity in his own home to secure the debt of another person, the creditor can sue the so-signer for the  possible repossession of  his home.