Should you file bankruptcy before or after a foreclosure?

[jab1226]

Hello, I am wondering what is recommended for filing bankruptcy.

Right now we are living in our home that is $100,000 underwater. I lost my job 9 months ago and we have kept up with the house payment until this month. We have the opportunity to rent a home from my uncle beginning May 2012, once their new home is finished being built.

My question has to do with the 2nd mortgage and 3rd mortgage. Since we are in MN we will not have to pay back any negative on the 1st mortgage. But we will owe the 2nd mortgage $33,000 and the 3rd mortgage $17,000. We also have several credit cards, medical debt, and two car loans.

We spoke with a bankruptcy attorney a year ago and we will qualify for chapter 7. Should we file bankruptcy now, and then foreclose on the house next summer? Or do we foreclose first, then file bankruptcy after?

Thanks!

[overspent]

You should file before foreclosure sale dare. That would give you additional stay in the house.

[drowning123]

Agreed with overspent. Also on your credit report, you'll just have a bankruptcy and not both a bankruptcy and foreclosure, which is a worse ding on your credit scores.

[footballfan]

So I'm curious -- does your credit report not reflect the notation of "foreclosure" until the actual public trustee sale takes place?

Would the mortgage just be reporting as XXX days late?

Thanks -- I've received notice of sale in Feb 2012 and plan on filing BK before then.

[bcohen]

The answer to your question depends on whether or not there is an association (HOA). If the answer is "no" then I would agree with overspent's advice. File for bankruptcy before the bank forecloses and you will delay the foreclosure thereby getting more months of free rent.

On the other hand, if there is an association, then it would be extremely foolish to file for bankruptcy until AFTER the foreclosure is complete and the house is no longer titled in your name. The reason for this is because many banks will deliberately delay foreclosure to avoid paying HOA dues, HOA fines and penalties (such as for overgrown grass), liability insurance, etc. When you file for bankruptcy, you can discharge any HOA dues and penalties which accrued before the filing date, but remain responsible for those costs going forward.

So if you file before the foreclosure, then you could find yourself in the situation where you no longer live in the house, but the bank "drags their feet" foreclosing, so suddenly you owe hundreds or even thousands in HOA dues and penalties. A lot of HOA's are agressively going after former owners (filing lawsuits, garnishing wages and bank accounts) to recoup this money. And of course, you can't file for bankruptcy for 8 more years, and the HOA (and their collection law firm) know this, so you can expect to be treated ruthlessly. Why risk it? Wait to file until the house is gone, and then you can dump ALL the debt associated with it!