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Mortgage included in bankruptcy could keep you from buying again

Mortgage Discharged in Bankruptcy is NOT Free and Clear?

December 2017 UPDATE:  When Fannie Mae changed the waiting periods for a foreclosure on a mortgage included in bankruptcy in 2014, there are still lenders and underwriters that will not, or cannot, approve these loans because they do not know the guidelines.  

Now, if you had a foreclosure, short sale or deed in lieu of foreclosure after the Bankruptcy, the waiting period to buy again begins from the Bankruptcy discharge date, not the subsequent removal of your name from title! – Read More Here >> Fannie Mae Waives Waiting Period After Bankruptcy

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Mortgage Discharged Through Bankruptcy

Much of this conversation has taken place in the comments sections of two articles from a few months back – Buy Again After Bankruptcy, Foreclosure and Buy Again One Day Out of Short Sale.

All of the conversations I have had around this subject are very similar in that:

  • I discharged my mortgage through bankruptcy
  • The home is upside down but I didn’t want to lose it
  • Now I want to buy a new home with a more affordable payment

What it boils down to is that when mortgage debt is discharged through BK, it does not mean that you own the home free and clear, and it doesn’t mean that you’re off the hook for the mortgage.

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When mortgage debt is discharged, you are protected against any personal liability should the home foreclose through or after the BK – this essentially means the lender cannot come after you for their losses.

Many times the mortgage debt will show up on the credit report as “included in bankruptcy” with is slightly deceiving because it implies that the debt is no longer owed…which is not the case.

The challenge is that if you decide you do not want to be shackled by  your upside down mortgage at any time in the future, you are still facing either foreclosure or short sale to rid yourself of the home.

To buy again after bankruptcy you have to wait for 24 months before you can use a FHA loan for the purchase of a new owner occupied home.

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Once the bankruptcy is complete, homeowners are still faced with the fact that refinancing into today’s lower rates is not possible due to the fact that the home is upside down.

Renting the home out to buy again after the 24 month bankruptcy wait is also a challenge, as I have detailed in this article: Can I Rent Out My Upside Down Home and Buy Again?

I am keeping a close eye on this, I think that many home owners are in this situation now after filing for bankruptcy a couple of years ago.

I think this is an important conversation to have as there are many families trying to get back on their feet after tough times.his topic?

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Do you have any experience or questions around this topic?  Please leave comments and questions below if you have a specific situation you would like to discuss.

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About the Author

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Bill Jackson says:

    I went through Bankruptcy 10 years ago, and now trying to refi under a 30 yr fixed. I had also had a HELO at the time of Bankruptcy, but that was written off by the bank. When my refi loan application is showing my HELO as still due for the previous Principle + Accumulating Interest.
    I called the HELO bank, and they said that although they wrote of the loan 10 years ago, they still hold a lien on my property and if I wanted to sell/ refi, I would have to pay back the HELO.
    Is this correct, and if so, what is the likelihood they would except a much lower amount that the remaining Principle, much less principle & accumulated Interest?

    • Scott Schang says:

      Hi Bill,

      Yes, this is correct. Bankruptcy does not eliminate debt, it only prevents the debtor from coming after you to collect, or report to your credit report. It’s quite possible that the heloc company will accept less than the total amount including interest, but they really are in the driver’s seat, unfortunately.

      You also shouldn’t have any trouble refinancing if you have that defaulted Heloc out there. Using conventional financing, the “waiting period” is only 4 years from the discharge of the bankruptcy, regardless of what happens to any attached liens. You just have to have the lien removed first, which requires paying them off.

      Hope this helps?