Mortgage Discharged in Bankruptcy is NOT Free and Clear?

August 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


Mortgage Discharged Through 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.

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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.

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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.

 

913 comments
concern59
concern59

Hello Scott: 

Bankruptcy was final November 2014.  Since then, after years of caring for my parents they both passed away in 2015.  We were all joint in tenancy.   I have a second which is due August 2017.  I am now working as an independent contractor.  I been managing to pay the house and interest only on the LC.  Both of them discharged in BK.  Is there a remote possibility to qualify for a loan to put both the mortgage and LC together?  I am terrify that comes August 2017 and the bank which carries the LC will come to haunt me. I live in California and the house value is higher than what I owe. Thank you.

ScottSchang
ScottSchang moderator

@concern59 Hi, thank you for sharing your story, I'm very sorry about your loss.  If you've been making all of your payments on-time on both the first and second mortgages for at least the past 12 months, then there might be an opportunity to combine the into a single loan using FHA financing, 2 years from the discharge fo the bankruptcy.

Maybe the bigger concern is going to be that as an independent contractor, you will need 2 years of tax returns as a self employed buyer to qualify for financing.

The good news is, I am in California, and I've got a lot of experience figuring out challenging qualifying scenarios.  If you would like to shoot me an email to scott@findmywayhome.com, let's continue this conversation and dial in your options and timelines.

aaamom
aaamom

My bankruptcy was discharged in 2009. I have 4 rental houses, that I did not take down...continued to pay and stay current on. I have refinanced 2 of them no problem. I tried to refinance the other 2, but now on my credit one of the 2 houses says included in BK, but no payment history. No lender will touch me now. This house was with GMAC before they went down. They were given notice, but new lender was not, OCWEN is the new lender. I am not sure how to fight this with the credit bureaus? I did not think they could put anything about BK if OCWEN was not the lender at the time of discharge, much less no payment history. Obviously I did not let much go since my median score is 740. What to do?

ScottSchang
ScottSchang moderator

@aaamom Unless you specifically signed a reaffirmation agreement with the lenders on the investment homes, the mortgages would be discharged through the bankruptcy.  That's very strange that you're being told that this cannot be done now.  

It sounds to me like the loan officer you are working with may not be familiar with helping people after a BK?

What State are you in?  If you would like, I can introduce you to a lender that can help.

bugsbunny794
bugsbunny794

My mortgage was discharged in bankruptcy in 2012.  I need to move out of my home.  Can I just do a deed in lieu to give the property back to the bank or is there something else I need to do.  I live in Illinois.

ScottSchang
ScottSchang moderator

@bugsbunny794 a deed in lieu is a great option.  I would speak to the lender and see what they are most comfortable with.  If you are not making payments, they can foreclose. Or you can sell the home.  If you owe more than the home is worth, it's considered a short sale. 

Using a conventional loan, you would be eligible to buy again 4 years from the discharge date of the bankruptcy.

I have a great lender in IL that I can introduce you to if you're looking at getting back into another home.  If you need an introduction, shoot me an email to scott@findmywayhome.com 

Hope this helps?

Sadgirl35
Sadgirl35

My husband and I were discharged from a chapter 7 bankruptcy in 2011 in which our home was included . We continued to live in the home and ended up remodifying it (a couple times). we were under the understanding that we could walk away at any time without any liability. Since then I went back to college, received a degree and we now have a much better financial status. We are upside down in this home and have outgrown it with our 3 children and need something bigger. I called the mortgage company to discuss options and they told me I could walk, do a short sale, foreclose , etc. So we stopped making payments just prior to my graduation to save money to buy a new home. Now we have lis pendens filed against us and we were just served with a judgement. I was also told by my broker that no one will finance us. Mind you, the judgement served has copies of an older modification, not the most recent one which clearly states we have zero liability and were discharged through bankruptcy , and the old one does not specify that or state that we were discharged of this debt through bankruptcy. What do we do now? I thought that conventional loans will use the BK date + 4 yrs as a waiting period ? can we get the deed transferred over to them and still obtain a new mortgage? Help please!

ScottSchang
ScottSchang moderator

@Sadgirl35 You may need an attorney to help you determine whether or not one of those modifications removed your mortgage from bankruptcy protection. It is entirely possible that if you modified the principal balance of the mortgage, that it is considered a new loan, not protected by the bankruptcy.

If you were served with a judgement, it sounds like you had an opportunity to address this with the lender prior to the judgement.  Do you recall received notices that the lender intended to pursue a judgement against you?  I would probably start by contacting the lender and seeing what they say.

Hopefully it's an error.  If it is, then you are correct about the Fannie Mae conventional waiting period guideline, it's 4 years from the discharge date, as long as you are no longer on title to the current home.

What State are you buying in?  If you're successful in getting that judgement removed, you're going to need an introduction to a lender that understands these guidelines.  Shoot me an email to scott@findmywayhome.com and I will try to make an introduction to someone that can help.

Sadgirl35
Sadgirl35

Thank you for your reply. I thought a reaffirmation not a remodification is considered a new loan (which we did not do). Our most recent modification in 2014 has a section that states that the lender acknowledges the debt was discharged in a bankruptcy and that they may not pursue us for liability but that they have the right to foreclose..so I don't think it is considered a new loan not protected by the bankruptcy .

We received a notice showing that we needed to pay x amount to bring the mortgage up to date but like I said , we thought that we could just walk away since it was included in the BK.

ScottSchang
ScottSchang moderator

@Sadgirl35 Oh, ok - I may have misunderstood....they are simply starting the foreclosure process.  That's totally normal.  It should not show up on your credit if it is included in the BK, and you're still eligible under Conventional guidelines as soon as title is transferred.

You may also want to call the lender and do a deed in lieu of foreclosure instead of foreclosure.  You may have a little more control over the timelines if you do it that way.

Sadgirl35
Sadgirl35

I see.... Ok thank you so much for your time and for your advice. I'll shoot you an email when we get this resolved.

Loanhelpplease
Loanhelpplease

I left the home 5 years ago and received a ch 7 discharge over 2 years ago. My ex (no marriage) still lives in the house we co-owned. The house was and still is in foreclosure but hasn't been foreclosed on yet. The mortgage debt was discharged, and a month before my two-year mark my hisband and I consulted a mortgage broker about qualifying for FHA. He said that I should qualify and long story short we found a house, got a contract, got pre-qualified, paid $2500 for the inspections and appraisal. The underwriter then did not approve us, saying it has to be three years from the foreclosure, when and if that even happens. That means potentially, if my ex keeps going back and forth with the foreclosure more (it's been in foreclosure for 10 years probably because the loan officer involved went to jail so the lending practices were in question), I could potentially never be able to buy again? I was quit claimed off the deed 2 years ago so have no rights to the property. This seems like a very unfair situation. Do I have no recourse other than to see if my husband can some how qualify for the new loan on his own? Thank you.

ScottSchang
ScottSchang moderator

@Loanhelpplease You should qualify for FHA financing now, it doesn't sound like the lender you spoke to has any experience with these guidelines.  

Shoot me an email to scott@findmywayhome.com and I can introduce you to someone that can help.  Please include the State you're buying in :)

Loanhelpplease
Loanhelpplease

Yes, I forfeited my rights. There was no equity. He's still living there and in foreclosure with a law day set but he keeps pushing it back. I haven't set foot on he property in 5 years.

Loanhelpplease
Loanhelpplease

@ScottSchang I'm buying in CT. I spoke with another broker who specializes in mortgages after bankruptcy. FHA requirements (everywhere) are that if there was no re-affirmation of the debt, or foreclosure, or the house was not sold, or my ex didn't refinance, then technically my name is still out there on an active loan regardless of the discharge. Even though I signed a quitclaim deed, the mortgage pre-dated the quitclaim and so until something definitive happens with that property, I am stuck. If he is able to refinance, I am free and clear to get FHA loan, but if the property gets foreclosed on, I have to wait 3 years from that foreclosure date. Not fair and makes no sense, but there we are. The loan broker went to 5 different underwriters with the situation and I spoke with a different broker as well.

ScottSchang
ScottSchang moderator

@Loanhelpplease ok, perhaps I didn't fully understand your situation.  When you say that you "quit claimed", you forfeited your rights to the property over to your ex, who's still living in the home?  Is that accurate?

What you've described is not consistent with any experience that I've had.

ScottSchang
ScottSchang moderator

@Loanhelpplease This is definitely a complicated situation.  I still think that it could be done, but it would take a lender that has a lot of experience with these guidelines, and they would have to work closely with the underwriter to make the case.

This is a tough situation, I think it can be done.  It's just going to take someone willing to fight for you.

Loanhelpplease
Loanhelpplease

@ScottSchang Thanks- after reading the FHA guidelines I'm not sure I'd come out victorious. We are trying to get my husband approved on his own and in lieu of that my mother is willing to cosign. I Just wish we had known about this hurdle going in before we spent thousands on inspections and thinking everything was going along fine. 

JJMurphosio
JJMurphosio

Hello Scott,

I did a strategic voluntary foreclosure a couple of years back. CitiMortgage sent me a letter of debt forgiveness which I still have and I even received a check from that huge lawsuit a couple of years ago. Before giving the house up, I applied for Deed in Lieu two times of which CitiMortgage was uninterested in. My question: Is there any precedent to take off a foreclosure on my credit report if I have a letter of forgiveness?

ScottSchang
ScottSchang moderator

@JJMurphosio The letter of forgiveness is evidence of the foreclosure, there's no way around the public record.  Unless you filed bankruptcy, it will also be on your credit report for a while.  In terms of qualifying for a new loan, it's simply a waiting period.  It's not a matter of "if" you can buy again, only "when".  

Are you trying to buy a new home? If so, and if you have not met the Conventional or FHA waiting period guidelines, there may be other, "temporary" solutions to get you into the home until you can refinance in the future into a better long term payment.

What State are you buying in?  I may be able to introduce you to a lender that can help when you're ready

JJMurphosio
JJMurphosio

@ScottSchang @JJMurphosio 

Thank you for the response and knowledge. I am not in the market and in fact, will not be for a few years yet to come. Even so, I will be purchasing my next living arrangement in cash. I simply didn't exactly like the blemish on my otherwise unscarred credit report, although it was not unexpected.

Thanks again!

Emich01
Emich01

Hi Scott, thank you in advance for your time. I'm in need of advice, but first let me give you a timeline of events that led me to be in the position I am now. In 2005 my wife and I buy our first little starter home together (co-borrowers). By 2009 we end up divorced, I stay in the home and continue to make mortgage payments. By 2011 ex-wife has financial difficulties and files bankruptcy chapter 7. Her intention with the mortgage was to remove her name and any liability to pay back said loan. During that time I was unaware of any ramifications her bankruptcy could affect me. Nor was I concerned and I continue paying mortgage and staying in the house, and continue business per usual. Which leads me to today, I am ready for a bigger home for my now growing family. In the process to get pre approved for a another mortgage I find that my mortgage payments have not been reported to the credit bureau as far back as 2013 and completely stopped reporting as of Jan 2015. The mortgage has been discharged by bankruptcy. I am current in my payments and never in danger of default or foreclosure. My credit is fairly good. I'm a little confused as to how I may now not be liable for repayment of loans because of a bankruptcy I did not file. My question is do you foresee any road bumps in getting approved for a new loan? What would be my best exit strategy on my existing home? Can I consider to stop making payments, and maybe walking away from home? I owe about $90,000 (OCWEN) and because of current market conditions in the area I'd be surprised if the home sells for $100,000. I guess I'm looking for direction or best plan of action to pursue.

ScottSchang
ScottSchang moderator

@Emich01 The mortgage not reporting on your credit report will not cause any challenges for you.  DO NOT "walk away" or you will not be eligible for financing for quite some time.  

If you can qualify for both payments on the new and old home, that would make things very easy.  You can also rent out your current home, and use 75% of the rents as "qualifying income" for the new loan.

You should not be declined for financing based solely on the fact that your mortgage payments do not appear on your credit report.  If you cannot qualify, it would be for other reasons.

Hope this helps?

Emich01
Emich01

Thank you Scott, this helps tremendously. Renting my home is an option I am seriously considering. I am now confident on how to approach my situation. Thank you again!

Smaterfirm
Smaterfirm

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annasmamma
annasmamma

Hi Scott, I want to thank you for being available over the last four years, you have been a wonderful resource.  You encouraged me to hang in there and the day would come when I could purchase a home again.  It will be three years since my short sale and I will be purchasing a home again in the state of Arizona.  I have one more road block that I would like to ask your opinion on.  While my short sale will be seasoned for three years, I do have some housing court fines that go back 7 years that have been turned into a collection agency by the City of Buffalo NY.  The judgement does not appear on my credit report so my score is about a 715 which helps me qualify for my loan.  My questions is this, once I go to purchase the home will the judgment appear as an outstanding amount that must be paid before closing on the home?  I understand that I can quite possibly work with the collection agency to pay off the fines, I think I will have a better chance at settling the fines for less than the original amount if I am not backed into a corner and have to pay them off or else lose closing on the home.  I have spoken with a Real estate attorney in Buffalo who has stated that the city is not really going after folks like myself because we had surrendered the home to the bank, filed chapter 7 and the bank never took the home back. Over the course of 4 years that the home sat in limbo, the city inspected and then fined my as the absentee owner. The attorney says don't pay it because it will fall off in ten years.   What do you think?

ScottSchang
ScottSchang moderator

@annasmamma If the collections do not show up on your credit report, then they will not be required to be paid off as part of the qualifying process.  If the collections do show up, you may have to pay them.

Contacting the collection company and trying to negotiate a reduce payoff is a good plan.  You definitely do not want the thing coming back to bite you later!

Hope this helps?

ChiPoo
ChiPoo

Bankruptcy chapter 7 discharged 4 years ago included house, now can't make payments. My Current loan has a loan modification with Making Home Affordable program.  I am currently 1 payment behind.  My husband lost his job 6 months ago and still can't find employment.   How long will a foreclosure process take in texas and what is the process to expect.  My husband is a veteran will that help any?

ScottSchang
ScottSchang moderator

@ChiPoo a non judicial state will leave you at the mercy of the efficiency or urgency of the lender.  It can take as little as 90 days.  I've seen it take years because the lender just doesn't prioritize the foreclosure.

Tough spot to be in, I'm so sorry.  Good luck!

ChiPoo
ChiPoo

There is no equity, market is still upside down here. I do know texas is a non judicial state.

ScottSchang
ScottSchang moderator

@ChiPoo I'm so sorry to hear about your hardship.  I am not familiar with the process timeline in Texas, I live in California.  Typically, once you miss 3 payments (90 days delinquent), you will receive a notice of default from the lender.  Then, depending on your State, the lender may have the right to pursue the foreclose process.  This process can take an additional 30 to 60 days.

I would reach out to your lender now and see if there is any way they can work with you.

Last thought, do you have equity in the home?  If you do, I would sell the home as soon as you can.  If you continue to fall behind on payments, and force the lender to start foreclosure proceedings, they will eat up any equity you may be entitled to with penalties, interest and attorney's fees.

If you have equity, and can sell the home, you will walk away with more money, and only have to pay the lender in full.

Hope this helps?

ChiPoo
ChiPoo

Thank you for the info. Will see if lender will help any

Szwarc
Szwarc

Hi Scott, wondering if you have ever heard of this. I filed bankruptcy and discharged august 2013. I included my BOA home loan in the chapter 7. In March of 2014 I did keys for cash. Then in may of 2014 the house sold and deed was changed. I am 9 days out from closing on a new home when the deed came back with foreclosure on it. I called BOA and they confirmed it was not a foreclosure and they claimed they would fix the deed. Unfortunately the target date for this is 30 days out and that doesn't include anything the recorders office needs to do time wise. My credit and bankruptcy both show the house was included and there is nothing else about foreclosure. Shouldn't my underwriter be able to get around this seeing it's an error? I can't wait because the sellers won't extend the closing date. Any advice?

ScottSchang
ScottSchang moderator

@Szwarc What type of financing are you trying to get approved for?  FHA? Conventional?  

The challenge I see here is that you were never eligible in the first place, and your lender has made a serious mistake by telling you that you are.

FHA financing would allow you to buy again 3 years from the date your name was removed from title, whether it was a foreclosure, short sale, or deed in lieu of foreclosure - that shouldn't matter.  Depending on what date your name was removed from title, you would not be eligible for FHA financing until March or May of 2017.

Using conventional financing, there is a 4 year wait from the discharge of the bankruptcy, and you can ignore any subsequent transfer of title date, as long as the title has been transferred.  Using conventional financing would put you at August 2017.

The last, and probably the only opportunity to save this transaction, would be if the home is located in a USDA eligible area.  If so, USDA follows similar guidelines to conventional by not counting the subsequent deed in lieu (cash for keys), as a second event.  USDA will allow you to buy 3 years from the discharge of the BK, which would put you right at August 2016.

Hope this helps?

AnnaWolfe
AnnaWolfe

My husband and I sold our home, we are in the process of moving the closing date due to the other party's lender found 2 leans against our home that we didnt know about,

we had to re open our chapter 7 bankruptcy, we r currently putting a offer down on a home. My lender stated to me that we would not be able to buy a house now for 2 yrs 1 day. We just got our discharge form our initial bankruptcy from 2014.

So again my question is do I have to wait another 2 yrs and 1 day. We live in Indiana

Thank you in advance

ScottSchang
ScottSchang moderator

@AnnaWolfe Are the liens from mortgages that were included in the bankruptcy?  It sounds to me like your lender does not fully understand the guidelines.

megamom6
megamom6

Some questions.......single mom here, lost job back in December, haven't been able to pay my mortgage. Tried a modification while collecting unemployment, they took until my unemployment ran out to decide and said no since my income was no just rental income (I own a duplex) The options given to me were deed in lieu or short sale. I really need to stay in my house. I am trying very hard to get a job. I guess papers have been filed in court because I keep getting letters from lawyers saying they will help but I have not been served yet. My furnace just broke, a/c isn't working and it is going to be over 100 here next few days. I really need some help with this and any ideas on what I can do to save my house. Otherwise how long would the process take for me to have to move? I am hoping to have a job in the next few weeks and then was going to try to modify my loan again. 


Thank you very much for any help in advance. 

ScottSchang
ScottSchang moderator

@megamom6 If you haven't already, I would consult a bankruptcy attorney.  Filing for bankruptcy will suspend any foreclosure proceedings that the lender may be pursuing.  This will probably buy you 3-6 months to find a job and save the money to catch up on your missed payments.

What State are you in?  If you're in California, I can introduce you to someone that can help.

megamom6
megamom6

I actually claimed bankruptcy over 6 years ago the last time I lost my job and fell behind in payments. I am in the state of Wisconsin

ScottSchang
ScottSchang moderator

@megamom6 I would maybe speak to your attorney about doing it again.  That will buy you the time you need to catch up on the payments hopefully.

Good luck!

LaurenMoniqueMarietta
LaurenMoniqueMarietta

Hi Scott!! Maybe a unique situation. I live in St. Clair Shores, MI, discharged chapter 7 in January 2011. Included my mortgage. I still reside in the home and only pay back taxes. I WANT OUT ( I have a family now and the neighborhood/schools are turning to crap)!! I could stop paying taxes, start the foreclosure process and wait three years to hopefully be approved but...1) Can I rent the home out month-to-month 2) I received a cash offer for the deed of the home (in my name as of 2015)...can I do that? 3) Why do I have to wait 3 years from foreclosure if its already been 2 years+ since bankruptcy? 4) Both MERS files are inactive


Do I have any options?

Thank you




ScottSchang
ScottSchang moderator

@LaurenMoniqueMarietta You definitely have options.  You would qualify for conventional financing with as little as 3% to 5% down payment as soon as your name is removed from title to the home.

Do you still owe more than the home is worth?  If you let the home foreclose, do a short sale, or cash for keys, you would be eligible for Conventional financing.  The 3 year waiting period you are hearing about it if you are trying to buy using a FHA loan.

Hope this helps?

LaurenMoniqueMarietta
LaurenMoniqueMarietta

@ScottSchang @LaurenMoniqueMarietta Thank you Scott. I owe probably 70-80K more than the house would sell for. SO...Would I have to pay the mortgage company back? There is no mortgage note. The Mers are inactive. My name is on the deed. There is no record of a bankruptcy with the county. Or can I just accept this cash offer and transfer the deed?

MarnieBentonPaffenroth
MarnieBentonPaffenroth

Hi Scott!  We also have a unique situation...  Filed 13 in 2012 to get rid of a very upside down home in Hawaii.  Paid all other debts back 100% and are within two months of completion.  The lenders have not foreclosed and we've continued to rent out the home (pay insurance on it, maintain it, and write off expenses and depreciation).  Husband retired from the Air Force and went back to flying for AA - so our income has doubled.  Trying to buy a home again with VA benefits, but we still legally own the old home - which is causing problems!  Have not heard a word about it in over three years (and it takes about two years to foreclose in Hawaii courts, so potentially have a lot more time).  Any thoughts or help you can offer?  We are working with an excellent mortgage broker, but it all seems to be new water to everyone in underwriting, as well as him.

Newmexicon1
Newmexicon1

Hi Scott

I was told that there may be a possibility of getting some kind of credit or limited reimbursement for having paid into the mortgage for 12 years.

Also, how do I go about asking

for that consideration as well as moving costs?

One of my mortgages insisted on sending me papers to apply for modification loan. I told him I had tried last last year but didn't qualify. He insisted.....isn't this a waist of time?

Thankyou.

ScottSchang
ScottSchang moderator

@Newmexicon1 You would only do a modification if your intention is to stay in the home.  I have never heard of a credit or limited reimbursement for having paid into the mortgage for 12 years.  That doesn't mean that it's not true, I just haven't hear of it, now would I have heard of it.

If you're asking the bank to take a loss on the home (it's worth less than what you owe), you can always ask for consideration, but it's completely at their discretion...they certainly are not obligated to pay for your closing costs or credit you for past mortgage payments.  It definitely will not hurt to ask the account person that is handling your deed in lieu of foreclosure!

nlb73
nlb73

Hi!  

My husband and I filed Chapter 7 in 2009.  We were advised the reaffirm our mortgages, as that would be the only way to stay in our house.  I realized later (as I was ignorant to this process) that the first mortgage was not reaffirmed, but the second one was. The second mortgage also is a 30 due in 15 year mortgage with an 9% interest rate (due in 5 years and we are getting nowhere in paying it down).  We have outgrown this house, but owe about $90,000.  Home is only valued at $75,000 and could use some work.  Homes in our neighborhood have not been selling well. We would love to move to a larger home, but do not know if we have any options at this time.  We can afford both mortgages with our incomes, we just need a bigger home.  Are we stuck?  

viking68
viking68

Chapter 7 discharge 10/13.  Staying in home.  Mortgage NOT re-affirmed.  Mortgage was modified about 2 months prior to the unexpected filing.  Means test dictated filing.


Current Lien of $406K on value of ~ $330K.  Of the $406K, $124K is "unpaid second principal balance".  Which is another way of saying that's what the unnamed national bank crammed down for a couple years of not paying during the financial crisis.  


At the point of modification, we had made trial payments, accepted into the 40 year loan and were NOT going to file BK..  Too many things hit too fast and it was inevitable.


Question:  Is there any route to getting a national bank, well you might well know which one, to negotiate a settlement for cash?  We've paid on time and up to date for over 3-1/2 years now.


I think it's despicable they were allowed to and I accepted the $124K cram down my throat, which, was basically interest they didn't earn because we couldn't pay, that now, we are paying interest on interest.


Am I crazy?  Is there a way out?  We're in our 60's and want to stay, but, I'm not paying 25% more than the property is worth.


Help?

ScottSchang
ScottSchang moderator

@viking68  I have a few questions:  Did you originally take out 2 loans, or is the $124k a lien they tacked on the to property to cover what they consider to be paid unpaid interest?  I am assuming that this is a balloon loan at the end of the first loan?  You said you're paying on-time for 3.5 years, is that on the modified first mortgage only? Are your intentions to stay in this home?

I'm not sure I understand your question.  When you ask if a national bank will negotiate a settlement for cash, are you suggesting that you will pay in cash an amount less than what is owed between the $406k and the $124?

viking68
viking68

@ScottSchang @viking68  Guess I could have been more clear.  The loan was modified prior to BK filing.  I accepted the mod -  40 year note with the (now) original $281K principal balance PLUS an additional second principal balance ($124K now) that was "tacked on" was for 37 missed payments, taxes and insurance.  A lot, I know.  It was the times.  So, mortgage lien is in the $406K neighborhood.  Foreclosure was staved off until we could afford the last-ditch mod attempt in February/March 2013.

My annoyance is banks in general being allowed to collect interest on interest.  Of that $124K, a substantial portion is interest.  

My question - what is likelihood they would accept a FMV cash offer on the house?  Is it even worth trying?  We intend to stay in the home and have not missed a payment from the initial trial (March, April, May 2013) to today - even going through Chapter 7, we always paid.  On time.  Bankruptcy was filed June 2013 and discharged October 2013, this mortgage (the mod) was NOT re-affirmed and was discharged.

ScottSchang
ScottSchang moderator

@viking68 Thank you, there are always a lot of moving parts in these situations.  What you are describing is called a "short refinance", which essentially means that your current lender allows you to refinance your current loans for a new loan that is less than what is owed.

As much as it sickens me to say this, the fact that you've been responsible, and made your payment on-time, there is little to no chance that your current lender will consider anything.  At least that's been my experience talking to hundreds, if not thousands of folks in difficult situations.

You're in a tough spot because your good payment history works in your favor now, and if you miss any payments, you lose any benefit you could have received from the payment history.

If you have cash, and you go to the lender and ask them to accept less than what's owed, it's possible that they would talk to you, but finding a lender to offer you a refinance is probably going to be pretty tough.

Now, here's kind of a crazy thing for you to consider.  Should you decide to leave this home, and either default (resulting in foreclosure), short sale (sell to someone else for less than what you owe) or do a deed in lieu of foreclosure, you would be eligible to buy a new home in 4 years from the discharge date of your BK using a conventional mortgage.

If you plan is to stay in the home, you're probably going to be held hostage by your current lender.

I really wish I had more ideas on what options you might have, but I just don't see anything else.

Hope this helps?

viking68
viking68

@ScottSchang @viking68 Thanks for letting me know my suspicions were correct.  Thing is, I want to "do" a lot of stuff to the house, new AC, resurface pool, new lawn, more insulation in attic, etc.  BUT.  If I throw $20K  into improvements, that would just be "lost" money if something catastrophic happens again and I just walk away as the mortgage was discharged.  Lousy position and I do feel held hostage.

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