When you file for a Chapter 7 bankruptcy, you'll begin a process through which the bulk of your tangible assets will be liquidated and distributed among your creditors. While your unsecured creditors will have to fight over your financial leftovers, your mortgage lender is guaranteed a sizable prize: your home.
Unless your state offers a particularly generous property exemption for real estate holdings, you may be required to include your house in your bankruptcy filing. This may be true despite your demonstrated ability to cover the cost of your mortgage. As such, your mortgage lender will initiate foreclosure proceedings on your home at some point during the bankruptcy process. Depending upon the state of the housing market where you live, this may take months or even years. In areas with high delinquency rates and understaffed housing authorities, the backlog of pending foreclosures continues to grow faster than local sheriffs can hold property auctions.
Although you may arrest the discharge of your mortgage by "reaffirming" your debt, this requires you to agree to repay its outstanding balance according to the contract's original terms. Given your precarious financial situation, this is an expensive commitment that may not be in your best interest.
However, you may be able to avoid foreclosure and eventual eviction without legally reaffirming your mortgage. You'll have to wield the overwhelming backlog of pending foreclosures as a weapon, continuing to make your payments on time as your lender waits to seize your home.
If you can consistently cover the cost of your mortgage over a period of many months, your lender may choose to terminate the foreclosure proceedings and permit you to stay in your home without technically reaffirming your mortgage. In some cases, you may even be able to refinance your mortgage, spreading its costs further into the future and lowering your effective interest rates.
This is because most mortgage lenders seek the clarity associated with a binding mortgage agreement. While they'll gladly take your money as long as you're willing to offer it, they may worry that you'll suddenly cease making extra-legal payments on your discharged mortgage and walk away from your home. If you do, they'll be forced to scramble to seize your home and may take a sizable loss on its sale. In the absence of a refinancing agreement, be sure to strengthen your continued claim to your home by keeping all associated tax and insurance payments current.