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Using Bankruptcy to avoid foreclosure

Posted by Kevin Vitali on March 15, 2011 at 8:34am in Short Sale Discussions

I have had to sellers that I have been going back and forth about short sales finally decide to go into bankruptcy.  There is a couple of points they threw at me that I was not confident in there validity.  I wanted to throw this out to the group so I can get a better understanding.

  • Can you restructure mortgage debt in bankruptcy?  My understanding is that when you put your house in bankruptcy, you still need to make the mortgage payments and you have up to five years to catch up on the balance in arrears. 
  • Can you make second mortgages go away?  Again, my understanding has always been that there is not to much you can do with secured debt in a bankruptcy.

I would definitely love to hear what people have to say about bankruptcy and how it affects a potential foreclosure and a homeowners ability to keep their home.

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Tags: Bankruptcy, Foreclosure, Massachusetts, Sales, Short
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Replies

  • Jason Anderson January 24, 2012 at 6:53am

    I read these forums quite a bit about being denied for loan modifications and going through the foreclosure process all the time. It's a pain in the butt.

    I was facing a foreclosure so I started trying to get a loan modification on my house to stop it. Well my lender (Bank of America) spent months "reviewing" my application only to come back, say it was incomplete, and deny it. I was no further along then when I started. I really had no clue what I could do anymore at this point.  My situation was either really unique or I just had no idea what I was doing.I definitely though that my house was as good as gone and that I was going to have to stop trying. I found help using Yellowpages online directory which had a company i was real happy with. At the end of the day I was able to find Stop Forclosure Defence Attorneys to help me out and at least now the foreclosure process has been stopped and we're in the process of finalizing the loan modification.

  • Kimberly Sherrod May 18, 2011 at 1:16pm
    I have a situation where the attorney told her to file BK and the house then would go back to the lender.  Guess what, BOA called her, told her she still owned the home and to do a short sale because they did not want to foreclose.  Also, that she needed to keep it insured and pay the taxes.  My client was dumbfounded.  Yes, in the state of Ohio you still own the home and have to maintain it.  UGH, what wonderful advice she was given.............

    The Negotiator said:

    If anyone says BK avoids foreclosure (and yes attorney's will say so) then they are gravely mistaken. Imagine the foreclosure process as a movie. BK simply pauses the movie until it is discharged. Once the BK is discharged the bank will still need to get their house back and so they will finish the foreclosure and take it back at auction (or let it sell to someone at auction). All the BK does for a homeowner is remove themselves from the debt of the mortgage(s). Therefore, the bank(s) cannot legally hound the the homeowner for any of the remaining balance once the foreclosure is complete and the house sells to someone. Basically, BK guarantees full satisfaction for the homeowner, but, at a very costly price. The homeowner will have (1) a foreclosure on their record and (2) a BK on their record. How awesome is that? If a homeowner is doing BK ONLY because they cannot pay their mortgage, advise them NOT TO until after the short sale. If you can get full satisfaction on the short sale then there would be no reason to file BK. Even if you cannot get full satisfaction, the banks are not suing for the deficiency (yet). 

     

    Moral of the story is not to file BK if the only reason is the house issue. However, BK might be the way to go if the house problem is only a small problem of the debt issue and the homeowner is drowning all over the place.

     

    Now, its important to be honest with the homeowner and tell them everything. Unlike BK lawyers who lie all day to homeowners (at least down here in SW Florida) and tell them the BK will solve all their problems. I actually had a BK lawyer tell the homeowner to just let the bank take the house. I wanted to END that lawyer in a bad way. Anyway, back to the point. If the homeowner does do a BK and the lawyer does the right thing and let the house be sold via a short sale, then the BK makes the short sale easier because a letter of approval with full satisfaction or not, it doesn't matter.

  • Jane Christie May 16, 2011 at 3:48pm


    Barbara McCormack said:
    I could you some advice on this issue as well. I have a short sale that is going no where with Bank of America. So the seller has decided to file bankruptcy and has pulled the house off the market, thinking her debt and obligation to her mortgage (AND large second mortgage) will be dissolved in the bankruptcy. She has actually been to a lawyer who told her not to agree to any terms of the short sale, her problems "will be solved" in the bankruptcy. Anybody know how that really works?
  • Carey Morales May 16, 2011 at 2:44am
    It may depend on the state, but if the value of the home is less than the first mortgage you can get rid of the second in a bankruptcy.  It is considered unsecured debt.
  • Ben Benita May 12, 2011 at 8:16am

    Be REALLY careful when doing this....we have had to post BK short sales where the second was "removed" or reduced down to nothing, BUT, they still had a "lien" on the property that had to be cleared....as always, watch the DETAILS!!!!

     

    All my best to everyone.

  • Bryant Tutas May 12, 2011 at 8:10am

    Here's an article from our Florida Assoc of Realtors that addresses this issue:

    http://www.floridarealtors.org/NewsAndEvents/article.cfm?p=5&id...
  • Deb Clark-Wyles May 10, 2011 at 11:30am
    In Washington state a second mortgage lien can be "stripped" in a Ch. 13 bankruptcy if there is insufficient equity in the home.  It's done by motion after the bankruptcy is filed but before a plan is confirmed.  Since bankruptcy law is federal law, I assume that is true everywhere, but I don't know for sure.  It's called "lien stripping".  You can probably google lien stripping and Ch. 13 bankruptcy and get confirmation.  I don't remember the authorizing code section.
  • Josh M. Boggs May 9, 2011 at 10:16am
    lol.. well I guess the "reputable" portion of my reply could have been left off, but my point is exactly what you mentioned.  If a client has already entered into a 13 and claimed they would continue making adjusted payments on the house; then stop making their trustee payments thus obviously shorting the mortgage portion; then the lender can still decide to foreclose if they so desire which would result as a bankruptcy AND foreclosure on their record.  Or so I have come to understand. 

    Kevin Hardin said:

    Josh,

    I not sure what you mean by reputable referrals vs referrals from not so reputable attorneys or how that bears but, to your point, Trustees here in AZ are not so inclined and not sure what you mean by non having a foreclosure on your credit as the inclusion of the home in the Bankruptcy and the subsequent relief of that debt precludes the lender reporting it at all. At the end of the day, the mortgages will simply be reported as included in BK. Now, if that homeowner reports in their schedules that they will retain the home and subsequently lose the home to foreclosure then they have a double whammy. 

    It is why most BK Attorneys advise their clients to just let it go. 

  • Josh M. Boggs May 9, 2011 at 10:12am

    Yes Thom,

     

    Thank you for helping me get that clear.  I mis-spoke about the "laws" itself.  My apologies.
    Kevin Hardin said:

    Thom,

    Yes Bankruptcy code is the same, but the Judges and Trustees are not, nor are the Local Rules the same. So, you can get dramatically different results state to state. Especially when we talk of homestead rights and levels of exempzt assets. If you don't believe that just compare NY and CA and their court decisions.
  • Bryant Tutas May 9, 2011 at 2:19am
    Great discussion guys!! It's all as clear as mud now!!
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