Bankruptcy is a powerful tool that can clear debt or prevent a foreclosure. Buying a home is an important rite of passage for many Americans. Declaring bankruptcy does not automatically prevent you from buying a home. Chapter 7 and Chapter 13 are the most common types of bankruptcy filed in America. Both types of cases provide borrowers with the possibility of getting a mortgage after bankruptcy. In Chapter 13 cases, the debtor may even be able to get a mortgage while the case is still open.
If you already own a home and file bankruptcy, there are generally two options, keep the home or get rid of the debt. There are advantages and disadvantages to each option. You should consult with a bankruptcy law firm in Tampa to learn more. Each case is different, and you should have a plan based on your specific goals.
FHA and VA Mortgage with Bankruptcy
The FHA and Veteran’s Association allow a debtor to qualify for a mortgage in just 2 years after the discharge. See FHA Regulation 4155.4 The discharge is a court order that releases the borrower from liability to the bank. As with most legal issues, the outcome will depend on the specific circumstances of each case. Thus, you should speak to a bankruptcy attorney to learn more about your case.
Fannie Mae Mortgage after Bankruptcy
Borrowers can become eligible for a mortgage with Fannie Mae in as little as two years after the bankruptcy discharge. Moreover, if a debtor makes twelve consecutive Chapter 13 payments they may have permission to increase their debt. The increase in debt may even include obtaining a new mortgage. For Chapter 7 cases, Fannie Mae will require borrowers to wait at least 2 years to qualify for a mortgage.
Difference Between Chapter 7 & Chapter 13 Bankruptcy
Chapter 7 is intended to be a liquidation bankruptcy. In Chapter 7 cases, the borrower may be required to liquidate non-exempt assets as a condition of the case. On the other hand, Chapter 13 is a reorganization bankruptcy. In Chapter 13 cases, the debtor consolidates their debts into one monthly bill that is paid to the bankruptcy trustee.
Unlike Chapter 7, borrowers are not required to sell their assets in a Chapter 13 case. Chapter 13 is considered a restructuring bankruptcy. In these cases, the borrower continues to make payments according to the Chapter 13 plan. Due to this difference, many creditors view Chapter 13 more favorably than Chapter 7 when evaluating borrowers for new loans. Both Chapter 7 and Chapter 13 have their unique advantages and disadvantages. If you are considering bankruptcy, speak with a Tampa bankruptcy attorney for advice on your specific needs.
Remove 2nd Mortgage from Home in Bankruptcy
Lien stripping can allow homeowners to remove the 2nd mortgage from their home. Lien stripping is a process that removes junior loans and changes the debt from a secured loan to unsecured. Unsecured debt has no collateral, like most credit cards and medical bills.
If the lien is stripped down to the market value, the remaining loan balance is treated as unsecured debt. For example, if you owe $12,000 on your car but the vehicle is only worth $5,000 then $5,000 is secured debt and the remaining $7,000 is unsecured. Stripped liens will receive the same treatment as all your other unsecured debts. Common examples of unsecured debt are credit cards and medical bills. Unsecured claims usually receive nothing or only a small amount of the balance owed.
Surrender Home in Bankruptcy
Some homeowners who file Chapter 7 choose to surrender their homes because they can no longer afford the home. In Chapter 7 cases, the borrower must file a “Statement of Intention.” The Statement of Intention is necessary to tell the bankruptcy court how you intend to handle the home. Some of the options include: reaffirm, modify a loan, or surrender your home.
If you choose to surrender, you can escape personal liability on your mortgage. If you surrender the property, you are walking away from it and forfeiting it to the Chapter 7 trustee. You are not allowed to defend a foreclosure action against your home after you receive a discharge. See bankruptcy case Failla v. Citibank. When you surrender the property, you will no longer be personally liable for the debt connected to the property. The surrender option exists to give you a “fresh start.” A creditor can no longer seek collection if the debt was discharged
Loan Modification with Chapter 13 Bankruptcy
Chapter 13 allows homeowners to force the bank to accept a 5-year payment plan for the past due amount. The homeowner won’t have to pay the full mortgage in 5 years, only the amount that is past due. You don’t need to apply for a loan modification, you can force the bank into the 5-year payment plan.
Additionally, you can apply for a traditional loan modification as part of the Chapter 13 case. These modification applications are usually much different than when a homeowner applies. In Chapter 13 mortgage modifications, the U.S. Trustee is there to oversee the bank. Additionally, there can be a mediator appointed as well to help streamline the process. With much more oversight the bank is less likely to cause unnecessary delays and wrongfully deny modification requests.
What is Mortgage Deficiency?
A mortgage deficiency occurs when the foreclosure auction does not yield enough money to pay the loan in full. For example, if a bank foreclosed on a home due to a $150,000 debt, but the home only sells for $1000,000, the bank is still owed $50,000. Therefore, there would be a deficiency of $50,000 still owed to the bank. The lender can then sue the borrower for the deficiency. If they get a judgment, the bank can garnish your wages and place liens on other property you own.
How to Stop a Mortgage Deficiency
For some homeowners, bankruptcy is the best solution to stop a mortgage deficiency. Under Bankruptcy law, a discharge will void a judgment, “to the extent that it is a determination of the personal liability of the debtor. If a debt is discharged in bankruptcy the borrower, will be released from personal liability on the debt. The discharge is a permanent court order releasing the borrower from the responsibility of having to pay the debt. Further, the discharge prohibits a creditor from taking any collection action against the borrower. Therefore, the discharge will prevent and stop a mortgage deficiency in Florida.
Bankruptcy law 11 U.S.C. 524(a) precludes creditors from trying to hold the debtor personally liable for a discharged debt. For instance, threatening to garnish wages or sue the debtor can be a violation of debt collection laws. A willful violation of the ban on collection activity can lead to sanctions being imposed on the creditor. These sanctions can include an injunction, monetary sanctions, reimbursement of funds paid by the debtor, and even punitive damages. Additionally, the creditor may be responsible for reimbursing a debtor for the money spent on an attorney to stop the collection action. See bankruptcy case In Re All Media Properties.
Consult a Bankruptcy Attorney in Tampa
If you are having a difficult time meeting your financial obligations, Florida Law Advisers, P.A., may be able to help. Our bankruptcy attorneys in Tampa have years of experience helping people solve their financial problems. We understand these are very difficult times, and we are here to help. In some cases, filing for bankruptcy may be a good solution, however, it is often not the only choice available. The right course of action will depend on the unique circumstances of each case. To see which options may be available to you, contact us to schedule a free consultation.
Frequently Asked Questions
Yes, homestead (primary residence) is protected in both Chapter 13 and Chapter 7 bankruptcy. Therefore, you may not have to lose your home as a condition of the bankruptcy. Additionally, you can apply for a mortgage modification or force the bank to give you 5 years to pay the past due amount with Chapter 13.
A borrower can become eligible for a mortgage with Fannie Mae after only two years have passed since a bankruptcy discharge. Moreover, if a debtor makes 12 consecutive Chapter 13 payments they may be given permission to increase their debt. The increase in debt may even include obtaining a new mortgage.
Yes, a second mortgage holder can foreclose on the home, even if your 1st mortgage is paid on time each month. Both home equity lines of credit and traditional 2nd mortgages may foreclose on a property. However, applying for a loan modification or Chapter 13 bankruptcy may stop the foreclosure.
If there is not enough equity in the home to secure the 2nd mortgage, the loan may be stripped and discharged in bankruptcy. This process is commonly referred to as lien stripping and may also be available for your car loan as well. If the lien is stripped, it will be treated as an unsecured debt in bankruptcy and be subject to discharge.
If a Chapter 7 or Chapter 13 case is filed an automatic stay will be put into effect. The automatic stay is a federal law that stops all collection activity, including foreclosure sales already scheduled to occur. Additionally, you can force the bank to give you 5 years to pay the past due amount with Chapter 13.
Yes, when a Chapter 7 or Chapter 13 case is filed an automatic stay is instantly put into effect. The automatic stay is a federal law which stops all forms of collection activity, including foreclosure auctions already scheduled to occur.
Often, after a foreclosure auction there will not be enough funds from the sale to pay the mortgage in full. When this occurs, the bank may sue the borrower for the remaining loan balance. However, Chapter 7 bankruptcy can discharge the full amount of the mortgage loan and end a borrower’s liability to the bank.
Yes, homestead (primary residence) is a protected asset in both Chapter 13 and Chapter 7 bankruptcy. Therefore, you may not have to forfeit your home as a condition of the bankruptcy.
Chapter 13 bankruptcy gives homeowners the opportunity to reorganize their mortgage debt into one manageable payment. In addition, it may provide up to five years to catch up on missed mortgage payments without being charged additional interest.