Mortgage included in bankruptcy could keep you from buying again

Mortgage Discharged in Bankruptcy is NOT Free and Clear?

December 2017 UPDATE:  When Fannie Mae changed the waiting periods for a foreclosure on a mortgage included in bankruptcy in 2014, there are still lenders and underwriters that will not, or cannot, approve these loans because they do not know the guidelines.  

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.

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.

 

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • ScottSchang says:

    Wisdom810 What an unbelievabley horrible story!  I am so sorry you have been dragged through all of this.  I am unfamiliar with the laws in Oregon, but I would strongly recommend you hire a real estate attorney to assist with this process.  I wish you the best of luck, and again, I am so sorry you have had this experience.  I thought the worst of this kind of thing was over by now, but evidentially there are a few cases out there still kicking folks when they’re down.
    Good luck, I hope you revisit and let us know what happens, and maybe someone in a similar situation will be able to get some guidance on how to proceed.

  • Wisdom810 says:

    I haven’t file bankruptcy yet but my mortgage for my property in Oregon for the last 24 yrs. was first with a company named Beneficial, then in 2005 I acquired Countrywide. I even refinanced in 02/2009 with Countrywide and they are who is listed on my promissory note and I paid them (Countrywide) for the rest of 2009 and started paying BoA sometime in 2010. When I signed the refi papers in 2009, someone came to my house and we sat at my kitchen table and signed away, is that normal? Thought it was kind of weird at the time. Something has my curiosity up. Fast forward to 2013 and BoA sends me letters that they have sold my mortgage to a company name Seterus and BoA quits billing me and I don’t receive any bills from Seterus either, so I called Seterus in 08/13 and ask why I haven’t been billed. I’m told that my mortgage was returned to BoA and they had no information why and after a long conversation I was told that it was a “business decision”. So I was given the Correspondence address for Seterus so I fired them off a letter to hopefully get in writing why my mortgage was rejected and sent back. Received a letter back saying something like they didn’t have my mortgage and  to contact BoA. So I ended up paying BoA for a few more months until I lost a job and got injured (hernia) on the job from another job. So I fell behind on my mortgage. When I came home from hospital in December of 2013 in my mail was a welcome packet from Seterus and  in the following days the statements from Seterus started arriving.  Eary in 2014 I worked with someone from Fannie Mae and she had me sending documents of my income, bank statements ect. over and over for over a month. When Seterus knew I was dealing with Fannie Mae they sent me a modification packet  saying I qualified for a modification  when I haven’t ever made a payment to Seterus. After Fannie Mae had me spend about 2 months sending them paperwork and hardship letters and proof of everything, they told me “Oh look, we we’re just notified that Seterus has sent you a modification, so fill out the paperwork and start making payments. Well I didn’t tell her this but the days of me just signing papers ARE OVER especially since the payments they were asking for was more than I could afford with the employment I have. So I didn’t do anything. Now in mid 2014 Seterus started moving my account to Foreclosure but in Oregon they are legislative laws saying the mortgage company has to go through mediation before they can foreclose. So I had to pay a non refundable fee to participate in the mediation but there’s a company name NEDCO that oversees these cases and they have a packet of paperwork and require the homeowner to go through some sort of housing counselling and within the packet they want to see all the promissory notes for the property. I haven’t been able to locate my copy of my promissory note so NEDCO told me to contact my servicer and they would have it. I called Setrus in early August and requested my note and they guy told me my foreclosure is on hold. He said he had to put in an order for the request so we’ll see what happens. I’m suppose to have my mediation hearing with the lender in September. I’m not sure how long it will take for Seterus to produce my note. I think my nightmare is just beginning.

  • ScottSchang says:

    mkcinca ScottSchang That sounds like GREAT news!  The only thing to be aware of is that if you “retract” your surrender, you may be pulling that debt out of bankruptcy protection, which means it would no longer be “discharged in bankruptcy” – I wouldn’t sign anything without running it by your bankruptcy attorney first.
    I am afraid that if you pull the 2nd mortgage out of BK, that you will no longer qualify for the waiting period being tied to the bankruptcy discharge.  I believe that under that circumstance, you would then be subject to a waiting period tied to the short payoff.  In addition to all of that, the lender has the right to come after you for a deficiency judgement for the difference between what you settled for and what you paid, or even submit the loss to the IRS which would trigger a possibly tax liability as it could be considered income, which you would have to pay income taxes on.
    Again, please consult a bankruptcy attorney and a CPA or accountant for guidance on these subjects.  I am only giving you my opinion and should not be taken as fact.  I am not a licensed attorney or accountant, I’m just trying to think of questions you should ask a professional 🙂

  • mkcinca says:

    ScottSchang mkcinca Followup:  After being sent to multiple different departments, I finally got through to someone who could help me at Chase. They had me in inactive accounts, so I was not accruing interest or penalties. She told me to send a note retracting my surrender and they would settle with me for a fraction of the loan. She was very cooperative, and said they do this all the time, they just want the loan off the books. So I sent the fax, and we’ll see. She told me to make an offer and we would go from there. Praying I’m not being played!!! I am going to offer $2500 on a $46K HELOC. I’ll keep you posted. Thank you for the advice, I already feel a little better. In the meantime, I took the house off the market. Once the lien is removed, I’ll re-list it.

  • ScottSchang says:

    panthr77 The good news is that your mortgage was included in your bankruptcy, so to answer your last question, you would be eligible to apply for conventional financing with 10% down in 4 years from the discharge of your Ch7.  If the bank has not started foreclosure proceedings, I would look for the short sale specialist (Realtor) in your area and begin the short sale process.  By starting this process, the bank will either offer a deed in lieu of foreclosure, or begin foreclosure proceedings.
    To buy using FHA financing, you would have an additional waiting period that begins from the day your name is removed from title and will end 3 years from that date.
    Hope this helps?  If you do not know a good short sale agent in your city, let me know where in NJ you live and I can reach out to my network and see if I know someone in the area.
    Hope this helps?

  • panthr77 says:

    Hi Scott,

    I filed chapter 7 bankruptcy almost 4 years ago in NJ, We did not include our home, but they never reaffirmed it because they said we are upside down, Every mortgage statement we receive states that we are not liable  to pay this debt back, but if we do not they will take our home.We continued to pay the mortgage for the last 3 years but did not get credit for it, Our credit report reads chapter 7 bankruptcy $0 balance for our mortgage. We stopped paying it almost a year ago when we were unable to sell due to owning more than it is worth, Our neighborhood has gone down hill, I feel very unsafe here. I just want my name off the deed so I can move on with my life, Should I do a deed in lieu or try and short sale?? And, How long before I can buy again…..

  • ScottSchang says:

    mkcinca ScottSchang you wouldn’t have to remove the lien before selling, the loans would be paid off as part of the sale.  You would not be able to sell without the bank’s permission if you are trying to pay less than the amount owed.
    If you were upside down, they would have to give you permission to pay them less than what is owed.  Since you have equity, they have no incentive to collect anything less than everything they believe they are owed.  
    You can certainly negotiate with them and ask them to waive fees or penalties, but they have no motivation other than being decent human beings.
    Unfortunately, they have all of the control in this situation because you have equity.  I’m actually surprised that they have not started foreclosure proceedings knowing that they could be fully compensated for what is owed to them.
    The first step is definitely to reach out to them and start exploring your options.   If you simply go into contract without coming to an agreement first, they will return a payoff demand showing everything they feel you owe them.

  • mkcinca says:

    ScottSchang mkcinca 
    I’m confused about removing the lien before I sell it. Wouldn’t they be paid out at the close of escrow with the proceeds? 
    Also, do you know if they will hit me up for late fees and penalties from the last 5 years?

  • mkcinca says:

    I’m confused about removing the lien before I sell it. Wouldn’t they be paid out at the close of escrow with the proceeds? 
    Also, do you know if they will hit me up for late fees and penalties from the last 5 years?

  • ScottSchang says:

    mkcinca If you are not upside down, then you will most likely run into challenges with the second lien holder.  You need them to remove the lien on the home before you can sell it.  You could certainly approach them and ask them to settle for less than the amount owed, and you would fall under the new guidelines that would allow you to buy again using the BK timeline IF both the 1st, & 2nd mortgages were discharged in the BK.
    Unfortunately, it is unlikely that the second mortgage will settle if you have enough equity to pay them. 
    The good news is, whether they take less than what you owe, or if you pay them in full, you should be able to apply for a new mortgage right away, and if you qualify, you may be able to buy again without further delay.
    Hope this helps?