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What Your Attorney Didnt Tell You About Mortgage in BK

What Your Attorney Didn’t Tell You About Including Your Mortgage in Bankruptcy

Mortgage Discharged?

My expertise is helping homebuyers understand the lending guidelines for buying a home after a financial hardship such as bankruptcy, foreclosure, short sale and deed in lieu.

One of the most common misunderstandings about life after a financial hardship, is what happens to the home after the mortgage debt is discharged.

Was there a foreclosure, short sale or deed in lieu happen after a bankruptcy?  Did you continue to make payments on the home?  Did you vacate the home, and stop making payments?  Did you continue living in the home and stop making payments?

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I am shocked by how many consumers come out of bankruptcy with absolutely no idea of how their homeownership is affected by the discharge.  This is where either miscommunication, or a misunderstanding between you and the bankruptcy attorney commonly happens.

In reality, most bankruptcy attorneys do not necessarily specialize in understanding how banks treat discharged mortgage debt after it is discharged.  Even if your attorney has experience in the past, old expectations have changed since 2008, and lenders do not seem to be following the old rules anymore.

You Still Own the Home

Most misunderstandings about what happens to your mortgage after a bankruptcy come from one of two places.  Either you’re asking the wrong questions or you’re being given incomplete answers.

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When you file bankruptcy, most people understand that it “wipes out” your debt, and gives you a fresh start (this is the simplified version).  While this is mostly true, there is another layer of information that most people miss when it comes to secured debt, specifically, a mortgage secured by real estate.

Title to the home is what determines your ownership interest in the home.  When you take out a mortgage against the home, it is secured by a lien against the property.  In the event that you default on the mortgage, the lender has a right to initiate the foreclosure process, which allows them to take ownership of the home (transfer of title), and sell, or auction it off in an attempt to recoup their losses.

When you discharge your mortgage in bankruptcy, there is still a lien against the property that secures the debt (mortgage).  What you do next will determine how the bank will deal with this lien.

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Unless a foreclosure, short sale, or deed in lieu of foreclosure took place prior to the discharge of the bankruptcy, you still own the home, you are still responsible for maintaining your insurance, and paying property taxes.  If you would like to keep the home, you are still responsible for making your mortgage payments, and the lender cannot take your home.

Buying After Bankruptcy

When you include a mortgage in bankruptcy, it prevents the lender from pursuing you to collect the debt (in the event of default), AND it prevents the lender from reporting late payments, foreclosure, short sale or deed in lieu on your credit report.  Losing the home after the debt is discharged in bankruptcy will not show as a negative mark on your credit report.  As a matter of act, your mortgage will stop reporting on your credit report altogether.

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Because your mortgage does not show on your credit report, this is where 99% of all “false loan approvals” come from lenders that are not familiar with helping buyers after a financial hardship.

What happened with the home?

The very first question is “What happened with the home after the Bankruptcy?”.  Depending on the type of loan you are trying to use, there is a standard waiting period after the Bankruptcy discharge before you are eligible to buy again.  SEE: Buy Again Waiting Periods

What catches most people off guard is that simply filing bankruptcy does not mean that you are on the road to recovery. Let’s take a look at some of the most common scenarios and the most likely solutions.

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Stopped Making Payments

If you stopped making payments, the bank has the right to foreclose, but many lenders over the past few years have been very slow to initiate the foreclosure process.  The result is a ZOMBIE FORECLOSURE!

Yes, a zombie foreclosure is as scary as it sounds.  Basically, you still own the home, as evidenced by your name being on title to the home, and the lien still exists against title.  You will be unable to buy a new home unless one of two things occur.

Either you make the mortgage current, and wait 12 months before being eligible to buy again, or you remove the lien by selling the home, foreclosure, short sale or deed in lieu of foreclosure.

Depending on which direction you go, you may have another waiting period that will start from the date that your name is removed from title.

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Continued Making Payments

If you continued making payments, you have more options.

  • You can rent the home out.
  • You can qualify for a new loan if you count payments from both homes.
  • You can do a short sale.
  • You can do a deed in lieu of foreclosure.

Depending on the type of financing you are using to buy the new home, there are different underwriting guidelines for renting out your previous home, and buying a new one.  The guidelines will vary in terms of proximity of the new home to the old home, and sometimes whether or not there is equity in the home you are leaving.

FHA will not allow you to use rents from a vacating residence unless the new home is 100 miles from the departing residence, AND there is at least 25% equity in the home.

Conventional financing will allow you to use 75% of the rents from the departing residence to offset the existing mortgage payment.

Yes, It’s Complicated

I know this is an extremely complicated subject.  There are many moving parts, and many different factors that can determine your options and timelines for buying a home after a bankruptcy.

If you find yourself in this situation, I have a few other articles that cover some of these scenarios.  I always answer any questions that are asked in the comments section.

You can either leave me a question below, or you can look at one, or all of these other articles and read through the questions that I’ve already answered.

Read More: 2016 Guide to Buying After Bankruptcy, Foreclosure, Short Sale or DIL

Read More: Mortgage included in Bankruptcy not Free and Clear?

Read More: Fannie Mae Waives Waiting Period on Foreclosure after Bankruptcy?

About Your Expert

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

Leave a Question or Comment About this Topic

  • cherz says:

    ScottSchang cherz Thanks Scott, I sent a message to Christine as well. I just want to make sure that I have added the correct info and not go on to much about things that don’t matter. I’ll send it over to you at the email.
    Thanks Cheri

  • ScottSchang says:

    cherz ScottSchang Hi Cheri, I do not have any experience personally with writing letters to the credit bureaus.  If this is important enough, I would suggest using a professional credit company.  I have a very good friend that I completely trust in the credit business that I would be happy to recommend to you.
    They are always willing to offer a free consultation as well.  If you are interested in a professional opinion, shoot me an email to scott@findmywayhome.com and I can make an introduction.

  • cherz says:

    ScottSchang cherz Hi Scott, I am putting my letter together for the Bureaus I would like some feed back from you and Christine is it ok if I email it to you? Thanks Cheri

  • cherz says:

    Christine Kingston cherz ScottSchang Hi Christine, 
    I am putting my letter together do you think I can email a copy to you before I send it so I can get your opinion. Thanks Cheri

  • cherz says:

    ScottSchang cherz Thanks Scott.

  • cherz says:

    Christine Kingston cherz ScottSchang Thanks for the info, I can’t find anything about a class 4. The first time they put them on they took them off. And once the house closed from the short sale they put them back on. I called the bureaus and they told me they already resolved this issue once so there for I need to contact Nationstar directly. I filed in 7/2010 chapter 13 the house was on the bankruptcy. And bureau was hit again in Nov 2014. Thanks for your help, I will send letters to all the bureaus.

    Thanks Cheri

  • ScottSchang says:

    cherz ScottSchang FHA is 3 years from short sale if the mortgage was delinquent prior to the short sale.  If there were no late payment, and you were forced to move due to a job relocation, or you moved more than 100 miles away, there may not be a waiting period at all.

  • cherz says:

    ScottSchang Is FHA (3) years after short sale? Or is that been changed to (2) years?

  • ScottSchang says:

    Christine Kingston cherz ScottSchang Thank you so much Christine!  You are the BEST!  Anyone reading this in California that needs an amazing attorney, shoot me an email to scott@findmywayhome.com and I can introduce you to Christine Kingston.

  • Christine Kingston says:

    cherz ScottSchang First, I’ve never heard of a “class 4” bankruptcy case, but I do know that we put creditors into different classes of debt in bankruptcy.  Also, remember that not all lawyers are equal in intelligence.

    I recommend that you send off a well crafted dispute letter to all three credit bureaus asking them to remove the lates and derrogatory information about Nationstar from your credit report because the debt was included and discharged in your bankruptcy case.

    Be sure to include a copy of your bankruptcy discharge order.  You may also want to note the date the case was filed too.  The reason for this, is that if those lates hit your credit report during the time you were in your bankruptcy case, then that could be a violation of the Automatic Stay (bankruptcy court’s order to stop collecting debts against you).  Look carefully at the dates.