Whether you choose to declare yourself insolvent under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code, you stand to lose much of your wealth to the bankruptcy process. Before you can pay off your various unsecured debts, which may include your outstanding credit card bills and court judgments, you'll need to satisfy your "senior" creditors. Your largest senior obligation is likely to be your home mortgage.
Once you've initiated the bankruptcy process, the judge presiding over your case will broker a plan to divide up your assets among your secured creditors. Unless you've paid your mortgage in full, your home will likely devolve to your mortgage lender. Depending upon the size of the balance remaining on your mortgage, you may be able to forestall this outcome by using your state's property exemption law to exempt a portion of your home's value from your bankruptcy. If the exemption is sufficiently large to cover the entire remaining balance, your mortgage lender will be unable to seize your home and you'll be able to remain in it after your other debts have been discharged.
If your mortgage is still new, it's unlikely that your state's property exemption will provide enough support to keep you in your home. Should you choose to do nothing and permit your mortgage lender to proceed with the foreclosure process, you'll have at least three months to settle your affairs and begin planning alternate living arrangements before you're forced out of your house.
In areas with a large backlog of foreclosed properties, this waiting period may stretch on for a year or more. Once the foreclosure process winds toward its conclusion, you'll receive a posted notice from your local sheriff or housing authority notifying you that the home is set to be auctioned on a future date. Once the notice has been posted, you'll need to leave your house as soon as possible.
You have two options for remaining in your house during and after your bankruptcy. Both require you to remain current on your mortgage payments. First, you may "reaffirm" your mortgage in bankruptcy by notifying your judge and your mortgage lender that you'll continue to make your mortgage payments. You may need to work out a revised payment timetable.
You may also simply continue to pay your mortgage on time. Mortgage lenders rarely initiate foreclosure proceedings against customers who remain up-to-date on their payments.