One of the most common myths about bankruptcy is that debtors will lose their home or car if they file bankruptcy. Another common myth is they will lose their home or their car if they file Chapter 7 bankruptcy; whereas they would keep it in Chapter 13 bankruptcy.
Often I will get calls from debtors who tell me they want to file Chapter 13 because they can’t keep their house or their car if they file Chapter 7. However, that is not necessarily the case.
In Chapter 7, you could theoretically lose your car to your panel trustee; however, the only way you would lose that asset to your panel trustee is if you have more equity in the item then you are allowed to keep. Most Chapter 7 debtors, particularly in this real estate market, do not have any equity in their home. As such, there is no threat of losing their home to their trustee. Likewise, most do not have equity in their cars either, so Chapter 7 bankruptcy will not cost them the loss of those items to their trustee.
That being said, Chapter 7 is also not the chapter for a repayment of arrears to either your car company or mortgage lender. Therefore, if the debtor is six months behind on their mortgage or their car payment when the case is filed, in Chapter 7 they are not devising a repayment plan. In that scenario, they might ultimately lose those items- not to the trustee- but to the creditor.
It is important to note however that this was true whether the debtor filed bankruptcy or not. As such, it’s not that Chapter 7 is costing them those items, but rather that Chapter 7 is not devising a way to keep those items. It is simply only temporarily relieving the debtor and not providing a long-term solution if the debtor wants a long-term solution.
Chapter 13 is designed to pay off arrears on secured debt. So if the debtor is six months behind on a secured debt payment when the case is filed, the debtor pays off the arrears as part of their monthly trustee payment. At the same time, the debtor also needs to make their ongoing mortgage payments.
If the debtor defaults on either the trustee payment or the mortgage payment, the bank will presumably eventually file a motion to lift stay, or the Chapter 13 trustee will file a motion to dismiss the case.
As you can see, neither chapter provides the debtor the ability to retain their house or their car without at a minimum, making the payments going forward once the case is filed.