How Bankruptcy Affects Keeping your Home and Foreclosure

Options for Debtors (current or in foreclosure) to keep their home or walk away

Foreclosure and Bankruptcy Can I keep my home or can I walk away from my home? And what happens if I do?

Wouldn’t the bank foreclose on my home if I do not reaffirm the mortgage loan because I no longer owe the money if I get a discharge?

You can keep your house after your Chapter 7 discharge, if you are current on your payments and continue to make timely mortgage payments. (Chapter 13 does not discharge a mortgage unless the debtor surrendered the house.). If you are current on payments, the bank would prefer to keep receiving these payments rather than foreclose and have to sell off a house. Therefore as long as you keep making payments according to the terms the bank has no reason to foreclose. The bank still has a lien on your home and can foreclose if you fall behind on the payments. However, as long as you are current, they will not foreclose. When you make your final mortgage payment, the bank’s lien will be removed, and you will own the home free and clear. Note, as mentioned above, if you did not reaffirm the debt, your payments (or missed payments) will not be reported to the credit bureau. See Reaffirming a mortgage loan in Bankruptcy and also see Credit Bureau Reporting of Mortgage loans after bankruptcy.

Can I keep my house if I stop paying my second mortgage and just pay my first mortgage?

Maybe? (assuming you did not reaffirm the debt), but you should speak to your attorney about strategy before taking any action. Second mortgage holders rarely foreclose, unless substantial equity covers the loan. (If a second or later mortgage holder forecloses, the first mortgage holder gets paid first, which generally means that the second mortgage holder will get less than its balance or even nothing.). For that reason, it is sometimes possible to negotiate a settlement with the lender holding the second mortgage for a fraction of the balance, particularly if the second mortgage has been unpaid for a long time. In some cases, second mortgage holders will forgive the loan entirely (typically after the guarantor has assumed the loan.). However, if you do not re-affirm and keep paying only the first mortgage, the second mortgage still has their lien on the property and at some point that you are close to paying off the first mortgage, then it may be worth the 2nd mortgage foreclosing at that time because their lien is worth the amount owed at that time. Therefore you should settle the lien rights if the 2nd mortgage has equity or remove the lien rights (called “stripping the lien”) if the 2nd mortgage has no equity. Either way this requires effective legal advice and strategy to determine your best actions.

Can I walk away from my home after my Chapter 7 bankruptcy? 

If you did not reaffirm your mortgage loan in Chapter 7, you have more options than if you reaffirmed the loan. (There is no reaffirmation in Chapter 13.) If you do not reaffirm any of your secured debt such as mortgage loans or lines of credit on your home and decide at a later date that you no longer wish to keep your home, you can simply stop making the payments. Eventually, the property will go into foreclosure, but the bank will not be able to obtain a deficiency judgment against you. (Remember, foreclosure by advertisement waives any deficiency in most case in MN).

Note that Chapter 13 does not discharge your secured loans in most cases unless you surrender the property in your Chapter 13 plan. Surrendering real property in bankruptcy does not give the property back to the bank or remove your name from the title. If you surrender a home in bankruptcy, you are letting the court and the creditor know that you no longer wish to retain the home. Your liability is discharged when you complete the bankruptcy and the judge signs the discharge order. The property still has to go through foreclosure to remove your name from the deed. You may also enter into a short sale or a deed in lieu of foreclosure. The deed will be transferred to the new owner after going through one of these processes.

What happens if I walked away from my home in Chapter 7 or Chapter 13? 

If you surrendered a house in bankruptcy (or later decide to walk away from your home on which you did not reaffirm the loan), you are responsible for any post-filing homeowners association fees and for keeping the property up to code until the property transfers to a new owner. If the grass gets too high or trash piles up, you could be fined by your city. If you fail to pay the post-filing HOA fees, the association can try to collect them. You still have potential liability for injuries to persons and other properties arising from your property until ownership transfers. If you stop paying for your homeowners insurance, the bank may purchase insurance on the property. However, such insurance typically covers the bank’s interest only. Talk with your attorney regarding your options and consequences of walking away, moving out, renting, or trying a short sale or deed in lieu of foreclosure.