A recent article on CNNMoney.com confirms what we've been telling our clients and readers: Yes, filing for Chapter 7 or Chapter 13 bankruptcy can help you save your home. It's not going to help everyone, but for those in the right situation, it can be a powerful tool to get you back on your feet.

Bankruptcy has a number of additional benefits, as the article points out, for people currently in foreclosure and for those whose homes have already been foreclosed upon. Both Chapter 7 and Chapter 13 can strip off second mortgages, kill deficiencies, and prevent you from having to pay surprise taxes.

Bankruptcy Stops the Foreclosure Process and Gives You Breathing Room

As soon as you file for bankruptcy -- whether you file for Chapter 7 or Chapter 13 -- a halt is put on the foreclosure process and other collection actions. This can give you time to reorganize your finances and make up missed payments, as the article mentions.

"It's the best tool there is for people behind in payments but who have ongoing income," according to a bankruptcy lawyer from Binghamton, New York, who was interviewed for the article, "those who had been making payments and who could be making payments again."

Both Chapter 7 and Chapter 13 Offer Help to Save Your Home

Chapter 7 bankruptcy usually results in assets being sold off, and that can include the home. Whether your home will be exempt from being sold to pay your creditors is something a bankruptcy attorney can determine for you.

On the other hand, Chapter 7 wipes away most or all of your unsecured debt, which may be enough to resolve your debt problems. Your mortgage is secured debt (which means a debt with collateral), so it won't be discharged in a Chapter 7 bankruptcy. If you qualify for Chapter 7 and you would be able to make your mortgage payments if you got rid of most of your other debt, Chapter 7 could make it possible to save your home.

Many bankruptcy attorneys prefer Chapter 13 for people who are trying to save their homes. This is because Chapter 13 sets up an income-based repayment plan that results in all of your qualifying debt being paid off or erased in three to five years. So, if you are able to keep up on your payments, you can emerge from Chapter 13 still owning your home.

Bankruptcy courts do not have the authority to reduce the total you owe on your mortgage, lower your interest rate or stretch out the term of your loan, in most cases.

However, if you are underwater on your first mortgage, they can "strip off" your second mortgage and treat it like unsecured debt. In a Chapter 7, that usually means that your second mortgage is discharged.

One final note: If you're in foreclosure -- or if you have already lost your home to foreclosure -- you should definitely get legal advice. There can be tax consequences you may be unaware of.

Related Resource:

"Bankruptcy can save your house from foreclosure" (CNNMoney.com, July 21, 2010)