What happens to my house in bankruptcy? I often hear folks touting bankruptcy as an answer to a foreclosure. This is simply not always accurate. Bankruptcy is a solution to debt issues. However, if you are hoping to save your home, filing bankruptcy will not in fact help you keep your home. A bankruptcy will only TEMPORARILY halt collection efforts from your lender, and will remove your personal responsibility to this debt. However you will inevitably have to repay the amounts owed, work out a repayment plan, modify the loan, or your home will end up in foreclosure anyway. Even once your responsibility to pay is eliminated, the lender can still collect their collateral – your home.
On the reverse side (and I actually hear more from people looking for this), if you are hoping to rid yourself of your home through bankruptcy, although your personal responsibility to the debt may be discharged, bankruptcy does not remove your ownership of the home. You will still be left as the legal owner of the home until you sell it or it forecloses. I have many clients who intend to or have already filed a bankruptcy, and wish to also avoid the additional ramifications of foreclosure. My experience has been that most bankruptcy attorneys will almost always advise the homeowner to “just let it foreclose”. While I can understand the viewpoint (a short sale does take some effort on the part of the home seller and “just letting it foreclose” may certainly be easier)…HOWEVER when viewing the big picture going forward, a short sale instead of a foreclosure will hasten the credit recovery of the homeowner and lead to new home ownership in a shorter period of time. Fannie Mae Guidelines for originating new loans require seasoning times of:
2 years from a short sale
2-4 years from a bankruptcy
5-7 years from a foreclosure
If you wish to buy a home again in the near future, the advantages of a short sale over a foreclosure, even before or after a bankruptcy are pretty clear. Click to read the full Fannie Mae Guidelines.For the record, I am NOT a bankruptcy attorney – this is not legal advice. I am a CT REALTOR® specializing in short sales, and my goal here is to share some basic information regarding foreclosures and short sales. If you are considering filing bankruptcy and need legal advice please refer to a qualified attorney in your area.
Minna Reid is The Broker - Owner of Reid Real Estate Group. Reid Real Estate Group is a full-service Connecticut residential real estate brokerage, specializing in helping homeowners with legal and financial challenges including short sales, probate sales and tax lien complications.