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Mortgage Discharged in Bankruptcy is NOT Free and Clear?

Mortgage Discharged in BKAugust 2014 UPDATE:  Fannie Mae has made a significant change is how it views mortgage debt included in Bankruptcy.

Now, if you had a foreclosure, short sale or deed in lieu of foreclosure after the Bankruptcy, the waiting period to buy again begins from the Bankruptcy discharge date, not the subsequent removal of your name from title! – Read More Here >> Fannie Mae Waives Waiting Period After Bankruptcy


 

Much of this conversation has taken place in the comments sections of two articles from a few months back – Buy Again After Bankruptcy, Foreclosure and Buy Again One Day Out of Short Sale.

All of the conversations I have had around this subject are very similar in that:

  • I discharged my mortgage through bankruptcy
  • The home is upside down but I didn’t want to lose it
  • Now I want to buy a new home with a more affordable payment

What it boils down to is that when mortgage debt is discharged through BK, it does not mean that you own the home free and clear, and it doesn’t mean that you’re off the hook for the mortgage.

When mortgage debt is discharged, you are protected against any personal liability should the home foreclose through or after the BK – this essentially means the lender cannot come after you for their losses.

Many times the mortgage debt will show up on the credit report as “included in bankruptcy” with is slightly deceiving because it implies that the debt is no longer owed…which is not the case.

The challenge is that if you decide you do not want to be shackled by  your upside down mortgage at any time in the future, you are still facing either foreclosure or short sale to rid yourself of the home.

To buy again after bankruptcy you have to wait for 24 months before you can use a FHA loan for the purchase of a new owner occupied home.

Once the bankruptcy is complete, homeowners are still faced with the fact that refinancing into today’s lower rates is not possible due to the fact that the home is upside down.

Renting the home out to buy again after the 24 month bankruptcy wait is also a challenge, as I have detailed in this article: Can I Rent Out My Upside Down Home and Buy Again?

I am keeping a close eye on this, I think that many home owners are in this situation now after filing for bankruptcy a couple of years ago.

I think this is an important conversation to have as there are many families trying to get back on their feet after tough times.his topic?

Do you have any experience or questions around this topic?  Please leave comments and questions below if you have a specific situation you would like to discuss.

562-999-1355

Scott Schang

Branch Manager at Broadview Mortgage Long Beach, California, I am passionate about educating and empowering consumers. Feel free to call, text or email me at (562) 999-1355 or ScottS@broadviewmortgage.com

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495 comments
2796land
2796land

Our 2011 BK included only vacation property (our residence was paid for by mortgaging the vacation place).  The original bank was bought out by another bank which never foreclosed but has been paying for maintenance, changed the locks and has never paid property taxes or HOA fees.  Just last week we heard from a researcher at the bank saying they're releasing the lien.  They'll send confirmation in writing in 3-4 wks.  It sounds like we've got it back and will be able to sell it to pay taxes and fees.  Is this too good to be true or does this actually happen to lucky suckers like us?

naymike1
naymike1

Scott I had a house that My and my mom were on the title and my husband was a cosigner and in 2011 we filed bankruptcy and this included the house.  We went to court and the bankruptcy has been dissolved.  Last December my mom passed away and I get a letter from a lawyer saying that I owe the house loan as a part of my mothers estate.  I went to court today and they are telling me in 60 days the lawyer is filing a summons and I will have to pay the mortgage.  How could this be????

nelablake
nelablake

My house went into foreclosure in 09.  I filed for Chapter 7 in 2010.  The bankruptcy was discharged in 2011 and the foreclosure was dismissed in 2012.  The bank did receive an automatic stay, however, only 287,000 of the original mortgages (355,000.00) was deemed secured.  Anyway, the house has been empty for 5 years now, I am still on the title as the owner, the bank has not refiled the foreclosure, the property is only worth 140,000 or less now.  The morgage (287,000.00) went to collections.  They began harassing me non stop so my lawyer got onto them, they stopped and paid me 1000.00 for their actions.  Now I get a notice from the collection company monthly describing my mortgage, the balance due, how they have purchased insurance and paid the taxes, etc.  they are also maintaining "My" property.  I understand they need to file a new foreclosure action, but if they do not what are my options?  I'd love to be living in my HOUSE! or I want my name off of it.  How do I accomplish this?

Mark9999
Mark9999

I assume you filed for Chapter 7 Bankruptcy. Why do you pay on a Mortgage that was discharged in bankruptcy? Even if you continued to live in the house, you have no legal responsibility to pay on a discharged loan. You received some very bad advice.


Affirmation of a debt can only occur while your case is moving through the bankruptcy court.  Once you receive a Discharge of Debt from the US Bankruptcy Court, you have no further obligation to pay the debt. I will read the actual wording of the Court in this matter:


"The discharge prohibits any attempt to collect from the debtor a debt that has been discharged. For example, a creditor is not permitted to contact a debtor by mail, phone, or otherwise, to file or continue a lawsuit, to attach wages or other property, or to take any other action to collect a discharged debt from a debtor.....A creditor who violates this order can be required to pay damages and attorney's fees to the debtor"


The wording speaks for itself.


Hope this helps you.

Mark9999
Mark9999

I'm assuming you filed for Chapter 7 Bankruptcy. Who ever told you to continue paying on a mortgage that was discharged in bankruptcy? Even if you continue living in the house, there is no legal reason for you to pay the loan. You have received some very bad advice.

MLMcFadden
MLMcFadden

I went through a bankruptcy in 2012 and the mortgage was discharged, but I was not in arrears on the payments and have continued to make them. I went to a credit union to apply for a HARP loan but they said since the mortgage was discharged (and GreenTreeServicing, which is still collecting the loan, keeps sending "this is not a bill" bills!) is not reporting my payments to the credit bureaus) so the credit union said they couldn't do a refi since there really was not a mortgage to refi - how the hell do I get through that mess! Property is slightly under water but if I could score a decent interest rate it could right-size in a reasonable amount of time! Any ideas to resolve this problem?



soccergirl2013
soccergirl2013

 I filed bankruptcy in Sept. 2011 and was discharged in Dec. 2011.  Of course my home mortgage was never reaffirmed so it isn't showing up on my credit report.  It shows up as discharged in bankruptcy.  I do still pay the house note.  I was just recently informed that they sold my mortgage to a new mortgage company.  My question is this new mortgage company will advise the credit bureau.  Will the mortgage now show up as a debt that is owed again even though I have not reaffirmed it?  I know they my force a reaffirmation now but was wondering until the due will this debt still show up as being discharged in bankruptcy since a new mortgage company has taken over and the fact it was not affirmed.

Mark9999
Mark9999

Regarding Geeooff1's comment about the bank's request for relief from automatic stay, this is nothing more than the bank asking the bankruptcy court to allow them to collect from you directly instead of waiting for the stay period to end. The practical results of this are the bank and/or it's servicing agent will be able to call you directly so the irritating phone calls will begin again. Also the stay allows the bank to move forward more quickly with the foreclosure rather than waiting for the completion of the bankruptcy process. My loan servicing company lied to me by implying the stay removed my home mortgage from bankruptcy protection. That is NOT TRUE! So be careful!

geeooff1
geeooff1

Hi Scott. I had filed a chapter 13 bankruptcy that was discharged in November of 2012. During the bankruptcy my mortgage company filed an order for relief from automatic stay. The court granted it so I went through as loan modification with them. On my credit reports only two out of the 3 credit reports are showing a payment history. Is this just an error on one credit report?

ShaunSigley
ShaunSigley

Hi Scott,

 I went through bankruptcy in March of 2013. My house was included and I decided to continue making payments without a reaffirmation agreement in order to stay living in the house until I was financially fit to move. I'm looking at moving at the end of next year and I would really like to know what I need to do to make the process as simple as possible. It's my understanding I will be able to get a VA loan after July of next year (2 year anniversary of my bankruptcy closing date) but I don't really understand the process that it entails. Will I have to pay back what is owed on the lien on my current house (I have about $5,000 of equity as it stands, leaving me with $5,000 to make a new purchase after the sale) or am I entitled to the entire sell price of the house (it's worth about $80,000)? What exactly do I owe the lien holders of my current house when I go to sell and how does that affect my chances of successfully getting a new loan?

LindaLawrence
LindaLawrence

 Hi Scott, My husband filed chapter 7 . Now we received a phone call stating they have a program to offer us money to move out is this normal ? Are should we avoid these this?


Felicia08
Felicia08

My Chapter 7 BK went through last March and I did not reaffirm my loan after BK. I decided to go ahead and leave the house to rent for a while several months ago since the house and maintenance was too much for me as a single mom, knowing that they couldn't come after me for the balance. I recently heard that they are going to sell the home at a foreclosure auction on 9/30, in eight days. They sent me formal notice via certified mail. I just received a letter from a property consultant looking to pay me $ for an interest in the title. Is this something I should do? Are there any caveats to this? I am no longer in the home and have no desire to move back or buy for some time. I am also the only one on the deed.

LisaDF
LisaDF

I live in Michigan and we short sold our home over 2 years ago.  Everyone signed off and we short sold the house to a buyer.  Now Fifth Third Bank is trying to come after us for the amount that they say we owe - they were our 3rd mortgage - home equity line of credit.


Seems odd to me because they signed off...can they do this?

Rjkmom
Rjkmom

My filed chapter 7 bankruptcy a few years ago. I also got divorced during that time frame. My ex wants me to quit claim our investment property to him. The property is upside down. I know I'm not liable for the mortgage but if I'm quit claimed off the property would I still get a 1099 for the debt loss if he short sales property and would I have to pay taxes on this difference?

Mark9999
Mark9999

Just for the record, when a house is foreclosed on, the bank sends a 1099-A  (Acquisition or Abandonment of Secured Property) to the former owner. This is normal even for property declared in a bankruptcy. When filing your 1040 long form, you'll have the opportunity to check this off as included in bankruptcy with no further issues. 


IF the property was used in business (re.g. rental, etc), the situation gets much more complicated. You'll have to file forms 4797 (Sale of Business Property), 8582 (Passive Activity Loss Limitations) and 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness). It's not complicated but you must have access to your previous returns to determine if you had a gain on the sale of the property after taking into account recaptured depreciation and other deductions. If you were seriously underwater to begin with, you shouldn't have any taxes owed. If this all sounds confusing and complicated, go see a tax attorney or CPA.


P.S.  I'm NOT an attorney or CPA.

Mark9999
Mark9999

Hi, I want to clarify something you have stated on this blog. From reading your responses to others, I believe you have stated that 4 years after a Chapter 7 bankruptcy, I can be approved for a conventional mortgage even if my former house title is still in my name. Is that correct?

suzq1411
suzq1411

Soooo confused and annoyed! My Husband and I filed for chapter 7 in 2011 received discharge in 2012. We also did a short sale on our home since BOA kept extending our loan modification process and eventually sent us a foreclosure letter. Short sale was approved and house was sold in 2013. We received a 1099 stating everything was payed off. 2 years later we are trying to use VA loan to purchase again. VA approved the loan but our lender just called us that Nationstar which eventually took over the loan during the short sale process is now saying that we owe 137,000 in late payments and placed in our credit report. Can they do this???

shaunnacarbonell
shaunnacarbonell

I live in Arizona and  chapter 7  bankruptcy was discharged over a year ago. We have remained in the home and continued to pay the mortgage and hoa fees. We now want to relocate and eventually purchase another home in another state. How do I get my name off of the title and how long can we stay in the home without paying the mortgage and hoa fees?

binnstacy
binnstacy

Hi I filed chapter 7.. 4 years ago for two investment properties that i foolishly bought and owed more than the equity. they were discharged and Its been seven years and the banks have not foreclosed on the properties.. A investor suggested to short sale the two properties so they could buy them from the bank... I would like to get rid of the properties and start over...Do you think this is a wise decision to try a shortsale?

ScottSchang
ScottSchang moderator

@2796land I have heard of other cases of this happening, it's definitely not too good to be true.  I usually see it happen when the bank doesn't believe that they could sell it for enough profit to justify the cost of maintaining property or executing the foreclosure - they are basically saying "It's your problem now!"

ScottSchang
ScottSchang moderator

@naymike1 Thank you for your question, and I am very sorry about your loss.  You definitely need an attorney on your side to help you through this.  I do not have enough information from your question to be able to offer a clear opinion.

If I am reading this right, it sounds like you, your husband, and your mother were on the mortgage?  If you and your husband filed BK, and you mother did not, then yes, her estate could be responsible for the loan.  I am also assuming that the mortgage was paid on-time until the time of your mother's passing?

Are you on title to the home?  If you are the legal owner of the home (which it sounds like you are), you have the right to sell the home to pay the mortgage, and retain any proceeds if there are any.

I apologize I cannot help further, I am not an attorney.  You definitely need to seek out an estate attorney in your State to help you through this.

By you filing bankruptcy, that only protects you and your husband against a deficiency judgement or from being taxed in the event that you should then default on the loan.  BK does not mean that you no longer own the home.

I hope this helps?

nelablake
nelablake

Also, the notices that come to me from the collection agency now say "this is not an attempt to collect a debt"...

MLMcFadden
MLMcFadden

@Mark9999  As I understand it, they cannot come after ME for the money - but they can take the property which they still have title to, and I would expect them to do so. It's not entirely valueless and could be resold.


What am I missing here?


ScottSchang
ScottSchang moderator

@Mark9999 Bankruptcy protection does not take the home away from you, nor does it relieve you of your obligation to pay the mortgage.  If you continue to make payments, you can stay in the home until it's paid off and you live happily ever after.  You can even refinance the home once the "waiting period" is up.  If your intention is to let the bank foreclose, or take a more proactive approach to getting the home out of your name, you can stop making payments.  If you stop making payments, the bank will eventually foreclose and you will lose your home.  Bankruptcy protection does not in any way, shape or form affect your ownership in the property.

MLMcFadden
MLMcFadden

@Mark9999  Well of course, if I don't pay the loan is still out there and can be foreclosed on and I don't want to leave this property, which includes acreage for my horses. When I penciled moving out, renting someplace for me and boarding my horses, it works to stay here - for now. It was my decision, no one told me to do it. I have reviewed the situation again with my bankruptcy attorney. It sounds like a new mortgage could be dangerous too, as would been the case if I had reaffirmed.

ScottSchang
ScottSchang moderator

@MLMcFadden That doesn't really make much sense, except that it's a credit union, and credit union's are not really great at difficult situations.  They tend to be very conservative and don't really like anything that's not plain vanilla.

What State do you live in?  Let me see if I can point you in the right direction.

1angell18
1angell18

We filed bk 2009 and had the same happening to us. Originally we had chase and it got sold to caliber home loans. The credit report didnt change still says included in Bk and our second being a credit line showed zero balance. We never received any thing forcing us to reaafirm neither modify, however we received letters with forms to fill out and send back if we want to do. In our case we eventually stopped paying on thw mortgage and let the house go into foreclousure since we were too upside down. I hope this helps

geeooff1
geeooff1

Well my mortgage is paid up to date and all arrears have been paid. I filed for bankruptcy in 2009, and it has been discharged back in November 2012. I have no concearns about foreclosure, my only concern is my credit report. As I stated, I went through my mortgage company to do a loan modification. How this information is portrayed in my credit reports is my question.

ScottSchang
ScottSchang moderator

@geeooff1 Yes, it sounds like a credit reporting error.  On an unrelated note, the loan modification removed your mortgage from bankruptcy protection, so no foreclosure is a good thing!

I would simply dispute the credit line with the bureau that is reporting inaccurately.  They will research it and should correct the trade line.  It may cost you a few bucks to order your credit report through the bureau, and disputing the line item online is free and pretty easy.  I would start there.

ScottSchang
ScottSchang moderator

@Felicia08 Thank you for doing your research Felicia!  DO NOT reply to that property consultant, it is a SCAM.  You are already on title, and when the bank forecloses on the home, you would have absolutely no rights to the home, nor would you want any.  I hope this helps :)

ScottSchang
ScottSchang moderator

@Rjkmom if your mortgage debt is included in bankruptcy, you would not be financially responsible for any losses incurred as a result of the mortgage defaulting, or selling the home for less than what is owed.

If you can quit claim off title, I would do so as fast as you can without even thinking twice about it!  You being on title will prevent you from purchase another home in the future.

Since the debt is discharged, you cannot be held financially liable for anything that happens with the mortgage.

As far as taxes go, you would not be responsible for any income taxes, however you may be responsible for property taxes if you're on title.  You would want to speak to a CPA or maybe even your BK attorney for tax advice.

The only downside to quit claiming off title would be if your ex-husband hangs on to the property long enough to earn enough equity to sell the home at a profit at some point in the future.  If that is his strategy, you may not be entitled to any of the equity.

Hope this helps?

shaunnacarbonell
shaunnacarbonell

@Mark9999 Hi Mark,

My bankruptcy was discharged last year that includedmy home but I did not receive this form.  Is that the way it works in every state?

ScottSchang
ScottSchang moderator

@Mark9999 Thank you very much for the correction and clarification Mark!  Your input is very much appreciated :)

ScottSchang
ScottSchang moderator

@suzq1411 Oh my gosh, I can imagine your frustration!  There are several things here that don't make sense.  Did you record a reaffirmation of mortgage along with the bankruptcy?  If not, then Nationstar should have no right to come after you for late payments or penalties.  If the mortgage is included in the BK, that should be end of story.  You will want to consult your bankruptcy attorney regarding this matter.  The 1099 also concerns me.  A 1099 typically means that you the losses the lender incurred as a result of the short sale were reported to the IRS as income, which you would be responsible for paying income taxes on.

First and foremost, you need to review your BK paperwork and determine if the mortgage was discharged.  If it was discharged, all this goes away, if it was not, you owe the money.

What State are you trying to buy in?

ScottSchang
ScottSchang moderator

@shaunnacarbonell you basically have 3 options for getting your name off title.  1.  stop making payments and wait for the bank to foreclose, 2. find an experienced short sale agent and list the home as a short sale, 3. contact the lender and inquire about a deed in lieu of foreclosure.

The 1st option should be a last resort.  The bank could take years to foreclose on the home and that could seriously hinder your ability to buy again.  If you are unable to get the home out of your name, you could buy using FHA financing in 3 years from the date your name comes off title, or 4 years from the discharge date using conventional financing.

Hope this helps?

ScottSchang
ScottSchang moderator

@binnstacy Yes, I think that short sale is the best way for you to have any control at all over the timeline for getting those homes out of your name.  Of course, the bank will have to determine the sales price, you are not able to set the price yourself.

Fannie mae guidelines would actually allow you to buy again as soon as your name is removed from title.  The waiting period to buy again using conventional financing is 4 years from the bankruptcy.

Hope this helps?

2796land
2796land

@ScottSchang @2796land Thanks for your input.  We certainly don't see it as a problem and anticipate being able to make a decent profit once we pay the past due taxes and fees.  We had one inquiry about buying it earlier this year but thought we couldn't touch it because the bank "owned" it.  The local RE agent who has been dealing in this resort development for years sounded like he would want to list it.  So we're keeping out fingers and toes crossed that it all works out the way we hope.  

naymike1
naymike1

@ScottSchang @naymike1 

Yes Scott this helps.  My mother moved out the home first in 2008 and they were originally going to foreclose which is why we filed bankruptcy we moved out in 2010 and no one has being paying the mortgage since 2010.  She had no assets when she passed just insurance that took care of her funeral.

ScottSchang
ScottSchang moderator

@nelablake You always have the right to Short Sale the home, or approach the new "owner" of the mortgage and do a deed in lieu of foreclosure.  If they attempt to renegotiate the terms of the loan, reduce principal, interest rate or extend the term, you would be removing the debt from bankruptcy protection.


I would suggest finding a local Realtor that is a short sale specialist with experience working with the bank that now owns your mortgage.

ScottSchang
ScottSchang moderator

@MLMcFadden @Mark9999  You are talking about 2 different things here - we need to reel this in or I am going to have to delete this comment thread so people don't get confused.

The bank does not have title to your home.  You are correct, the bank cannot come after YOU for the money.  That said, if you continue to make your mortgage payments, the bank has no right to take your home, you are meeting your contractual obligation (mortgage) and there is no recourse that the bank can take.

Mark is correct about reaffirmation, and about the bank not being able to come after you for the debt, however you're missing the very important part here of the fact that you have the option, and personal choice to either make the payments and retain your home, or stop making your payments and the person who lent you the money can take back the collateral (home) securing the debt (mortgage).

Even if you filed Bankruptcy, and you have equity in your home, you can sell the home tomorrow, pay the bank the balance of the mortgage, and walk away with the profit.

Does this make sense?

MLMcFadden
MLMcFadden

@ScottSchang @MLMcFadden  I'm in Washington state. My bankruptcy attorney also suggested taking a pass on the credit union, and reminded me of why it would not have been a good idea to re-affirm - but if and when I get a new loan - that will put me back in the position of being liable for any shortfalls - assuming the next mortgage has a clause like that, which I would assume is standard procedure at this point in time. This is all about getting clear of a stinking 7% loan!

Rjkmom
Rjkmom

Thank you so much. There is not much chance of it regaining all the equity. It's upside down by about $100,000.

shaunnacarbonell
shaunnacarbonell

@ScottSchang @shaunnacarbonell This debt was discharged in the bankruptcy.  If I can get the bank to agree to a short sale or a deed in lieu of foreclosure how long will I have to wait before I can qualify to purchase again in another state?  Will the clock start when my name is removed from the title or when the bankruptcy was discharged?  I apologize for so many questions.  I just want to be sure that I am handling things correctly.

nelablake
nelablake

@ScottSchang @nelablake Thank you!  The sad part is the house has been vacant for 5 years now and has depreciated not only because of the housing situation, but also because of the vandalism done to the home.  We 378,000 for that place and now it's not even worth 120,000.00.  

MLMcFadden
MLMcFadden

@ScottSchang @MLMcFadden @Mark9999  This clarifies things very well. Thanks for explaining that the bank doesn't have "title" but it does still have the ability to take the property if I opt to default. I have opted to continue to make the payments. It was when I went to talk to a credit union about the refi (I'm past the window)  that I got confused and apparently the credit union is as well. But it gave me a chance to reconsider the value/risk of getting a refi versus living with the existing ugly interest rate but having the ability to walk away. Right now I'm opting to stay put both literally and financially!

ScottSchang
ScottSchang moderator

@shaunnacarbonell absolutely no reason to apologize!  I honestly wish more people would ask more questions :)  The waiting period, and starting point for that that waiting period will depend on what type of loan you are trying to use to purchase your new home.

If you are using FHA financing with 3.5% down payment, the waiting period is 3 years from when your name is removed from title.

If you are using Conventional financing with 10% down, the waiting period is 4 years from the discharge date of the bankruptcy.

If you are eligible for VA financing with 100% financing, the waiting period is 2 years from the date your name is removed from title.

MLMcFadden
MLMcFadden

@ScottSchang @MLMcFadden  And I would assume that any new mortgage would have a clause to hold the purchaser responsible for any deficiency should that occur on the new mortgage? Whatever happened to a mortgage only on the property value? It seems like this situation is a buildup to a new round of bankruptcies during the next downturn - the banks always win!


ScottSchang
ScottSchang moderator

@MLMcFadden @ScottSchang there is no such clause, it's a new loan.  Your BK protection only protects you against default on the current loan.  Once that loan is paid off, defaulted, the protection does not carry forward to new loans and liabilities after the fact.

I know, it's a crummy situation and it feels like you just can't win.  If you know you're going to live in the home, look at the refinance.  If you really cannot afford to live in the home, look at another solution.  Good luck, and you're right, the banks pretty much got their way through this whole mess.

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