Bankruptcy & Forclosure Timeline

[RickInMich]

I'm trying to get all my ducks in a row before going to the attorney later this week. My question here concerns "letting the house go."

Between the 1st and 2nd mortgage, we currently owe more on the house than it's worth. Now, I think it's possible after Ch. 7 that we could afford the payments, but it would be tight. Frankly, I'd be willing to let the house go. But I'm quite confused.

I know a mortgage survives bankruptcy, but when do you allow foreclosure to happen? I'm not even sure how to ask that question. Say we file bankruptcy and try to keep the house. After, say, six months we realize we cannot keep the house. If we let it go into foreclosure, and the house sells for less than it's worth, are we responsibile for that deficiency? Is there no way to have that discharged? How do we go about the planning of all this?

Rick

[lrprn]

I know a mortgage survives bankruptcy, but when do you allow foreclosure to happen? Say we file bankruptcy and try to keep the house. After, say, six months we realize we cannot keep the house. If we let it go into foreclosure, and the house sells for less than it's worth, are we responsibile for that deficiency?

If you file bk and state you intend to surrender the house, your mortgage lenders will file with the bk court to lift your automatic stay and start foreclosure proceedings. As long as you DO NOT reaffirm the mortgages, any amount left over after the house is sold is wiped out and you walk away owing nothing.

However, if you file and state you intend to keep the house, then what happens if you default on the home's loan payments later depends on whether you sign reaffirmation agreements for the mortgage loans or not.

If you DO NOT sign a reaffirmation agreement for each loan and later after filing you have to walk away from the house, then you will owe nothing. However, you are committed to making every mortgage payment ON TIME or the lender can start foreclosure proceedings against you.

If you DO sign a reaffirmation agreement (and your lender is likely to do everything they can to get you to sign one), then if you have to default on the payments later and the lender forecloses, you will owe everything that is left over on your mortgage loans after the house is sold at auction.

Can you get rid of this shortfall without paying it? Unfortunately no. Since you've just filed bankruptcy, there's no way to wipe this debt out for another eight years if you file Ch 7 again or four years if you file Ch 13.

Run these scenarios by your lawyers during your initial consultations to see what each one recommends will be best for your unique financial situation.

[RickInMich]

If you DO NOT sign a reaffirmation agreement for each loan and later after filing you have to walk away from the house, then you will owe nothing. However, you are committed to making every mortgage payment ON TIME or the lender can start foreclosure proceedings against you.

If you DO sign a reaffirmation agreement (and your lender is likely to do everything they can to get you to sign one), then if you have to default on the payments later and the lender forecloses, you will owe everything that is left over on your mortgage loans after the house is sold at auction.

Thank you, lrprn! I have gotten great info these last couple days from all you guys, and I really think I'm finally set to meet the attorney with my head on straight!

One last question. Do the 1st and 2nd behave the same way?

Can they force you to affirm if you want to keep the house? Or, in the alternative, can they start foreclosure if you don't affirm? I would prefer not to affirm, but continue making the payments. Is that even possible? (Which, by the way, I will ask my attorney about all this, but if you have a chance and see this post, I'd appreciate any info you have.)

Rick

[lrprn]

Do the 1st and 2nd behave the same way?

When the house is sold at foreclosure, the first mortgage is paid in full first, then the second gets whatever is left over.

Can they force you to affirm if you want to keep the house? Or, in the alternative, can they start foreclosure if you don't affirm?

No, lenders cannot force you to reaffirm.

The current bk law states that you are supposed to reaffirm, redeem, or surrender all assets, but what bk lawyers and clients are finding is that even if you do nothing, the lenders aren't coming after non-reaffirmed asset unless there is significant value in the assets beyond what you owe or you are late making payments after your case closes. The lenders get far more money for far less effort by just allowing you to keep on paying what you owe at the original loan terms until the loan is paid in full.

Find out from the bk lawyers you talk with how not reaffirming an asset loan is working out for their clients with secured creditors in your area.

Keep us posted about what you find out, ok? Good luck with your lawyer interviews!