Filing for personal bankruptcy is often cited as a way to stop or delay mortgage foreclosure. But what happens to a person’s home in the months and years after a bankruptcy discharge? Bankruptcy may temporarily relieve the threat of foreclosure, but it doesn’t necessarily offer lifetime foreclosure immunity.
Here’s a closer look at some issues homeowners might face after filing for bankruptcy to prevent or delay foreclosure.
Second Mortgages & Home Equity Lines of Credit
One major concern for people who bought houses or refinanced their homes during the housing bubble is “junior mortgages,” or the secondary and tertiary loans and lines of credit that many homeowners were able to afford when housing prices kept rising.
Now that home values have fallen around the country, many of these secondary loans are unsecured – that is, the value of the house is less than the value of combined primary and secondary mortgages and/or credit lines.
Worry comes into play when the so-called “balloon payments” come due on these secondary loans: many homeowners simply don’t have the money on hand to cover such payments and are afraid of losing their home to foreclosure processes started by secondary mortgage lenders.
If you’re in that situation, here’s some essential information:
- Filing for bankruptcy might help. If you haven’t already filed for bankruptcy and are having trouble making payments on secondary mortgages or lines of credit, you may be able to discharge them during a bankruptcy case. If your house’s value has fallen below the total value of your loans, secondary mortgages become unsecured debt, which is often dischargeable in Chapter 7 bankruptcy.
- Reaffirming debts may be risky. In Chapter 7 bankruptcy, filers have three options for how to treat secured debts: they can reaffirm them (i.e. agree to keep making payments), redeem them (i.e. pay the remainder in one lump sum) or surrender the attached property (i.e. stop making payments and lose the collateral). If a filer reaffirms secondary mortgages in Chapter 7 bankruptcy, she is responsible for repaying them regardless of what happens to the house (i.e. even if she loses the house to foreclosure).
- Lender negotiation may be possible. Chapter 7 filers who do not officially reaffirm a secondary mortgage but continue making payments may be able to negotiate modified payment terms if they become unable to afford those payments. This is particularly true if your secondary mortgage loans are unsecured: though the lender could legally foreclose, it would have to pay proceeds for the home’s full value to the primary lender before taking any money itself.
- Debt collector negotiation may be possible: Because most secondary mortgage lenders aren’t likely to make a profit from foreclosing, there’s often a better chance that they would sell the debt to collectors than that they would foreclose. In that case, you may be able to negotiate with the debt collectors for lower monthly payments or a reduction in principal. If you do successfully negotiate modified loan repayment terms, be sure to find out whether you’ll have to pay taxes on the difference.