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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

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.

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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.

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.

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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.

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?

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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?

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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  • Miri says:

    Our story began in the last recession when we both lost our jobs. BOA sent us a foreclosure notice in January 2010. Yep, that’s how long it’s been. They did not have the note, so we hired a lawyer and at least one unscrupulous company to save our house. The lawyer fought for us until, in 2013, our resources were gone. We filed a Chapter 7 bankruptcy, and on the advice of our lawyer, we left the house FOREVER and didn’t look back. In 2016, living in another state, we tried to purchase a home, but BOA had not foreclosed so it looked like we still owned the house. I began to make calls… the bank told me it was the county’s responsibility to sell the house, the county said it was the bank’s responsibility to sell the house and on it went for YEARS. This year 2021, now almost 8 years after that debacle, we tried to purchase a home in Nevada. We were going to get a conventional loan. We paid for an inspection and appraisal. Then, all the paperwork went to underwriting where the CAIVRS report showed a foreclosure in 2018!!! I literally fell to the ground when the loan officer called me. Because it was a conventional loan, we cannot move forward. We are just about out of the danger zone for an FHA loan… but I will have to now pay for another inspection and another appraisal that applies to FHA loans. I want to sue someone, seriously! Are you kidding… hitting us with a foreclosure for a house we haven’t owned or lived in for going on 8 years?!!! We were beginning our move into retirement in 2013… the loss of the house was like an atom bomb. Now, were much older and we could have been homeowners again in 2016. The equity in that house could have reached well over 100K in the Utah market. The damage these banks have done is irreparable.

    • Scott Schang says:

      Hi Miri, something isn’t right here. Yes, you would use a conventional because the waiting period is 4 years from the discharge of the bankruptcy, and you can ignore the foreclosure. Conventional loans DO NOT use CAIVRS. Only FHA does. Something is wrong here, and I think there might be a communication error somewhere. If this lender right now is telling you that a CAIVRS alert came up on a Conventional loan they either have no idea what they are doing, or the have some crazy rules that nobody else follows.

      I know it’s a bit of a time crunch here, but it sounds like your current lender has abandoned you. Shoot me an email at scott@findmywayhome.com and I will introduce you to someone that I know and trust that has experience with these guidelines.

      Hope this helps?

  • Crystal says:

    My husband and I declared bankruptcy that was discharged in 2010. We did not reaffirm the loan, however we continued to live in and make payments until recently. We needed a larger home due to family members moving in with us. We initially tried to refinance to lower our payments, and thought we could use the extra money to build an addition, but since the house is a manufactured home we could only find one company who would refinance, and the rate would not have saved us enough to make it worth our while. We purchased another home with a VA loan. We then contacted the previous mortgage company to inform them that we had moved. Our payments were paid up to April 1st. We requested to do a deed in lieu of foreclosure so the house would not continue to be in our name and accrue property taxes. The mortgage company contacted us and said that because the original loan was an FHA loan that they require us to do a short sale. Can they do that since we don’t technically owe the debt? Does agreeing to a short sale make us liable for anything, such as the realtor fees or any mortgage balance if the house sells for less than what is “owed”, which I am pretty sure it will. Is this a better option than just letting the mortgage company foreclose even though the house was included in the discharged bankruptcy? If they foreclose what negative impacts would this have? Since we just took out a 30 year mortgage I just don’t want to find out that agreeing to a short sale is going to create more obligations.

    • Scott Schang says:

      Hi Crystal, you are not financially liable if the loan was discharged through bankruptcy.

      Now, if you try to refinance your VA loan in the next 3 years, you could run into an issue with CAIVRS, which reports delinquent government-backed debt like student loans, FHA loans and SBA loans.

      Technically, VA does not recognize a short sale as a hardship that requires a waiting period, but you will inevitably encounter this issue if you try to refinance.

      The “waiting period” for CAIVRS to be removed is 3 years from the date of the default / short sale.

      Does this answer your questions?

  • Lisa says:

    My ex husband and I divorced in 2009. By 2011 I was unable to continue keeping up on the mortgage. I received a letter in 2012 notice of loss mitigation. Bank of America then sold the loan to Bayview lending. I attempted to do a loan modification through Bayview but was unable to because my ex husband would not sign off. And 2012 I file bankruptcy which was discharged in December of 2012.

    I attempted to hire an attorney last yeat to see about filing for quiet title as the 6 year statute of limitations had been met. However it was complicated by the fact that only I file bankruptcy and my exhusband had not. Subsequently, I learned my exhusband also consulted the same attorney and was advised that he needed to do a quit claim deed transferring the deed into only my name and removing his name. This was the same attorney that filed my Bankruptcy.

    After I had consulted with the attorney and attempted to obtain information/documentation from the lender to see about filing a quiet title Bayview lending then sold the loan to Shell Point mortgage. It is now 2021 and it has been over 10 years since payment has been made on the mortgage. The city continues to bill me monthly and that bill is now up to over $6000.

    We also had a second in the amount of aporoximently $65,000 which was written off in 2012 or 2013 but Bayview did not send a tax statement until 2019 (to claim on our taxes) when they sold the 1st loan to Shell Point. Mine tax statement showed that I did not have to claim it (due to bankruptcy) but the one sent to my ex husband showed he did have to claim it is income. Even though it was at least 8 years later.

    The original first mortgage loan was in the amount of a $137,000 now escalated is showing the total balance at $282,000. In this market I certainly can sell the home but I have to pay capital gains on the difference between the $137000 in the $282000, which I do not want to do. I am in a position where I could offer to try to pay a settlement of the proximately a $125000. This would obviously leave a great short fall between the 287,000 in the 125,000. Since I file bankruptcy would I be required to claim that shortfall on my taxes as earned income or would it be like the second and not affect me due to the bankruptcy? Or will offering a settlement negate my bankruptcy in this case?

    I just feel like I’ve gotten a lot of really bad advice through this whole process when I made numerous attempts to try to do the right thing and at times was unable to do the right thing because of bad advice. I thought that bankruptcy was going to make this issue go away and the bank would take the home but it is sitting and rotting, I have has squatters in it that I had to have police remove. It is not currently livable so I am not able to rented out. Obviously the bank has no intention of foreclosing on a either.

    • Scott Schang says:

      Hi Lisa, I am not qualified to offer legal advice, but I can tell you what the guidelines are for qualifying for a mortgage after the bankruptcy, and/or subsequent default on the mortgages against the home.

      My advice is that you sell the home if you can. I would not settle any mortgages because they have been discharged through bankruptcy. You have no legal obligation to pay those mortgages unless your intention is to keep the home as your primary residence or a rental property.

      If it’s just sitting there and the bank will not take it back, you should just sell it. I believe there is a capital gains exemption if you lived in the home as your primary residence for 3 of the last 5 years. If you’re beyond that, the capital gains taxes would only be paid if you made money from the sale. If you make money from the sale, you pay the taxes and this thing is completely behind you.

      By selling the home, the lender will take whatever is due to them. They will pack as much interest and penalties into that payoff that they can and your actual tax liability and profit may not be as much as you think.

      Either way, selling the home solves all of your concerns and gets this behind you. I don’t know that you could have done anything different actually. And the bankruptcy will prevent you from having any hits to your credit because of the mortgage.

      I know there are a lot of moving parts here. If you would like to discuss this further, feel free to email me directly at scott@findmywayhome.com

      I hope this helps?

  • Melinda Stone says:

    Hi Scott, I filed a chapter 7 that was discharged in Feb 2019. I have been paying my mortgage ever since filing in Nov 2018. I have never missed a payment or been late. I know I should have caught this sooner but am quite confused now. I looked at my credit report with all 3 bureaus and my payment history stops in Nov 2018 and says my mortgage was discharged. As far as I know I did not reaffirm but am unsure. I did not want my mortgage included in bankruptcy. The statements on my mortgage state- “Our records show that either you are a debtor in a bankruptcy or you discharged personal liability for your mortgage loan in bankruptcy.” At this time I am living in the condo and do not have plans of moving. I need to get this straightened out before I want to sale or buy another home. How do I figure out if my mortgage has been totally discharged Or if not, how do I get my payment history back on my credit reports?

    • Scott Schang says:

      Hi Melinda, typically all debts are included when you file bankruptcy, but all that means is that “If” you stop making payments, the creditor cannot harass you and they cannot report it to your credit report.

      Unfortunately, your payments will not be reported on your credit report, but if it’s necessary, you can get a payment history from the lender.

      You do not have to get this straightened out. You would be eligible to buy again using an FHA loan 2 years from the discharge of the bankruptcy as long as your mortgage payments have been current.

      It is important that you work with a loan officer that has experience with bankruptcy guidelines. Far too many loan officers do not know the rules and give consumers wrong answers.

      If you’re looking to buy now, shoot me an email at scott@findmywayhome.com and let me know what State you’re buying in. I would be happy to introduce you to someone that I know and trust that have experience with these rules.

      I hope this helps

  • Ann says:

    My husband and I filed Chapter 7 Bankruptcy and it was discharged. We did not reaffirmed our house and continued living in the house. Due to COVID, no payments was made on the house for 4 mos. Our bank closed out our loan due to discharged. My husband and I have to relocate to another state for his job. We no longer will be living at this property. What can we do legally? Will we be legally responsible if the bank foreclose on the property since we have a bankruptcy discharged?

    • Scott Schang says:

      Hi Ann, bankruptcy does not impact your ownership in the home, and waiting for the bank to foreclose could cause major issues in the future if you try to buy a new home.

      Do you have equity in your home? If so, you should sell the home. That will pay back the missed payments and will put you in a position to be able to buy a home after you move with no challenges.

      I would not just walk away, even though you can do it “legally”. You will still have a foreclosure tied to your name in public records and it could come back to haunt you later.

      I hope this helps?

  • Michelle says:

    Hi, question here. We filed Ch 13 in 2010 and paid everything back and was discharged in 2015. We have always paid our 1st mortgage on time and it was not included on the bankruptcy. I’m not sure about the 2nd mortgage and as we stopped paying it in 2015. We got behind on it and never could get in touch with anyone to figure out how to pay it (no one could find the account number, etc…) silly I know, we could have tried harder, but money was tight and then it got scary ( like if we brought it to someone’s attention… they would take the house or demand thousands at once..which we didn’t have ). The weird thing is, both the first and second are with the same lender as well as one of our cars and they continue to send us things for refinance, credit cards, etc… We owe 220,000 on the 1st which has always been on time since we got the loan. The 2nd was for 100,000. The house is now in today’s market worth at least 500,000 and our credit scores are in the 700’s and DTI ratios are in range. I would like to refinance and put it all together, but don’t even know how to start or if they would let us when all of this comes to light. Any suggestions???

    • Scott Schang says:

      Hi Michelle, this is definitely a complex situation, but by no means impossible! It is possible to refinance, but it will require that you pay off the second lien. This can go a couple of different ways. The second lien holder can require that you pay late fees and penalties and drive up the payoff amount, or, if they are reasonable you can negotiate a reduced settlement amount. Either way, it’s going to have to be addressed. Under conventional bankruptcy guidelines, as long as you have an on-time payment history on the first and the second was discharged through the bankruptcy, it meets the waiting periods following the bankruptcy discharge.

      Where this gets tricky is finding a loan officer and lender that understands the guidelines, knows how to document the discharge of the second mortgage, and has specific experience with all the moving parts.

      If you would like, I can introduce you to someone that I know and trust that has experience with these guidelines, and can at least start unpacking all of the moving parts. You will also have to meet all debt to income requirements because your payments may increase due to rolling in the second mortgage that you haven’t been making payments on.

      Shoot me an email at scott@findmywayhome.com and let me know what State you live in. I can introduce you to someone to start figuring this out.

      It’s also important to point out that if you do not pay off the second mortgage, they are legally able to start foreclosure proceedings, which would put you in a defensive position and make it much more difficult to negotiate.

      I hope this helps?

  • Larry says:

    Hi, My name is Larry, I am currently a year and a few months in my chapter 13, and was told that I could purchase a home. So I got qualified and recieved a pre approval letter, and found a property. Made it to the next step with the conditional approval. Then the issues started, I had assumed a loan, with my parent back in 2005 and surrendered the property in Chapter 13, but lender will not approve the loan unless, the lender removes me from the loan. How would a go about getting this done, to show that I will not be liable for the previous loan?

    • Scott Schang says:

      Hi Larry, using an FHA loan that is manually underwritten it is possible to qualify for a mortgage with the Judge’s permission. It sounds like your loan officer might be a little over their head and may not have a lot of experience with these guidelines. It’s not a guarantee that you will qualify, and it’s going to take some research and a lot of legwork to get this through an underwriter.

      I am happy to introduce you to someone that I know and trust that has experience with these guidelines. I think you should get a second opinion at this point. Get another set of eyes on your file and see if there’s anything else that your current lender missed.

      If you would like, shoot me an email at scott@findmywayhome.com and let me know what State you’re buying in.

      I hope this helps?

  • Michele Vigneri says:

    Hi Scott, My husband and I had a discharged bk 7 in February 2010 in CT. We included the house as we had no equity and missed several payments. When we filed, we retained but we did not redeem the mortgage. We lived in the house after the bk7 and paid nothing to the lender while we lived in the house looking for a rent. We were foreclosed on in 2014. The lender sold the house in 2015. We repaired our credit over the years and currently our landlord wants to sell the house we are renting from them and is giving us the first right to buy before they put it on the market. We have been going through the application process for a conventional loan and the process is now going on two months so far. We are told that because we retained on the bk 7 paperwork and didn’t surrender that we are subject to wait 7 years from transfer of title which was 2015 to the new owners. We were told if we get a letter from our bk 7 lawyer explaining why we retained then we can get the loan. We paid $200 to our bk 7 lawyer to write a letter by which he wrote that the house was surrendered in the bk 7 discharge, therefore we are subject to the 4 year waiting period from the bk 7 and we are not responsible for the transfer of title and are not subject to a 7 year waiting period from that time of transfer of title. But the lender is now saying the letter means nothing and no matter where we go, all conventional lenders will say we will need to wait 7 years from the sale/transfer of title to the new owners. We are told by the lender that we need to wait until 2022 to qualify for a conventional loan. Please HELP. We can’t believe that we have to move to another rent until we finally qualify for a conventional mortgage in 2022. What are our rights? We are completely devastated and hopeless. We thought we’d be in the clear of any repercussions of our past from 2010.

    • Scott Schang says:

      Hi Michele, that might be an overlay at this particular lender.

      I don’t know what your timeline is, but I can definitely introduce you to someone that I know and trust that can help you with this. The guideline that applies to your situation is, and I’m paraphrasing: a 4 year waiting period following the discharge of your chapter 7.

      There is no additional waiting period for the subsequent loss of a home discharged through the bankruptcy.

      Shoot me an email to scott@findmywayhome.com and let me know what State you’re in. I have friends that can help that have a lot of experience with this exact situation.

      No reason at all to worry. This is a very common situation that we’ve seen many times.

      Hope this helps?

  • 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?