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Was there a mortgage included in your bankruptcy?

Mortgage Included in Bankruptcy?

Since 2011, I have been focusing much more time and energy to educating folks about being able to buy again after bankruptcy, foreclosure, short sale or deed in lieu of foreclosure.

One of the most common questions I get is in regards to including a mortgage or mortgages in bankruptcy.

This is a tricky question because it seems that bankruptcy attorneys do not always do a great job of explaining to folks what it means to include a mortgage in bankruptcy.

Bankruptcy does not protect you from foreclosure

One of the biggest misunderstandings about including a mortgage in a bankruptcy is that folks believe that once they do, they no longer own the home.

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This could not be further from the truth.  Bankruptcy protection simply protects you against the bank suing you and getting a deficiency judgment (sue you for the losses they incurred) IF you should default on the mortgage.

It’s also important to understand that while you cannot be held accountable by the lender if you default, you are still responsible for the mortgage and you are still the owner of the home.

While filing for bankruptcy will postpone the foreclosure process, it does not pay off the mortgage or protect you from foreclosure.

The problem I see most often is that after filing for bankruptcy, on the advice of the bankruptcy attorney, folks stop making payments on the home and either just walk away or continue to live in the home until the foreclosure proceedings are complete.

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The challenge with walking away or simply “waiting it out” is that the banks are taking YEARS to foreclose in many cases.  As you can see from the comments on an earlier article I wrote “Including Mortgage in Bankruptcy is NOT Free and Clear

Protect yourself and buy again sooner

The main purpose of this article is to help you understand the process so that you don’t have surprises in the future once you’ve gotten back up on your feet.  My suggestion is that if you feel that you will not be able to keep the home, and if you want to be in a position to buy another home as soon as possible, consider either a deed in lieu of foreclosure or a short sale.

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Neither option will cost you money to do, and both options will at least give you control over the process and help you buy again sooner than if you were to allow the bank to foreclose on the home.

If you have any questions about your options, feel free to live chat, shoot me a private email, or leave a public comment below.

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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  • Rebecca says:

    In 2007 I purchased a condo in Florida and then was hit by the 2008 housing crash. I tried to maintain the condo as best as I could but was advised it would be better to cut my losses and file for chapter 13 bankruptcy in october 2013. I was put on a 5 year plan and was discharged in oct 2018. I have since brought my credit up to the 800s and my bankruptcy as well as my previous mortgage has fallen off my credit report.

    I recently found a home, went into contract, preapproved by Citibank and now the underwriters will not approve my loan because there was a loan alert flagged stating my name was associated with a foreclosure of a property in florida on 8/2018.

    My question is do I have any chance of salvaging my purchase? Am I eligible to apply for a conventional loan at this time? I am trying to purchase in New York.

    I’m so distraught and saddened by this as I thought i put the bankruptcy behind me.

    Thank you for being so helpful to so many people.

    • Scott Schang says:

      Hi Rebecca, if the home was foreclosed in 2018 there is a 3 year waiting period before you would be eligible to use an FHA loan to buy a new home.

      Using a Conventional loan that follows Fannie Mae guidelines, you are eligible 2 years from the discharge of the Chapter 13.

      Citibank is either trying to use an FHA loan or they have an overlay which means they choose to follow their own guidelines which are more strict than the published underwriting guidelines.

      If you haven’t already, shoot me an email at scott@findmywayhome.com and let me know what State you’re buying in now. I can introduce you to a mortgage expert that I know and trust that has experience with these guidelines.

      I hope this helps?

  • Kerri says:

    I saw your email when trying to research this topic. I’m so confused and am begging for some clarity. So I’m reaching out to you since you are the expert! Here is my dilemma and question.
    My husband filed chapter 7 bankruptcy 3 years ago. He had two mortgages when he bought our home. We did not reaffirm the mortgages. We continued to stay here and pay the first mortgage. However we didn’t pay the 2nd. Now they are foreclosing 3 years post bankruptcy. Our mortgages do not show on our credit bureau and payments did not either. My husband and I were just approved for a mortgage. The foreclosure is next month. I’m freaking out because my lender isn’t sure what will happen when the title company does a title search after the foreclosure! Is this going to be another waiting period? It’s been 3 years since the bankruptcy discharge and I’m hoping we don’t have to wait again. Please advise at your convenience.

    Kindest Regards

    • Scott Schang says:

      It was a pleasure speaking with you Kerry! It is disappointing that there are lenders out there that are unwilling to tell you that they do not have experience with these guidelines, so I’m glad we had an opportunity to talk and figure out your game plan. You’re making the right decisions and we’ll connect you with a mortgage professional when you’re ready!

      Hope this helps?