What You Need to Be Aware of When Filing Bankruptcy While in Foreclosure

Just the other day, I met with a potential client who is in the middle of a divorce. She’s losing her home, and she has enormous credit card debt. She came to me to inquire about the possibility of doing a short sale. She was explaining that she had already met with a Bankruptcy Attorney and he told her to file for Chapter 7 and just let the house go! I said Whoa…. put the brakes on! I asked her “did he tell you what steps that you need to take with the house after putting it in the bankruptcy?” Obviously her reply was “No, I was told that once I put the house into bankruptcy that I was done and I don’t have to worry about the house anymore.” Wrong, Wrong, Wrong!!! Granted, you don’t have to worry about the debt associated with the home, remember that is why you are filing a bankruptcy on the debt.

I am not a bankruptcy attorney, and I’m certainly not about to offer any kind of legal advice, but I thought that a bankruptcy only helps to resolve debt issues. Correct me if I’m wrong, but it does not take your name off the title. So, what does that mean? If you put the house into bankruptcy but the house is still titled in your name, then you are still responsible for that property until you sell it or the bank takes it from you through foreclosure. Let no one tell you differently. Remember that multi-page mortgage contract that you signed at closing? Somewhere in the midst of all that black and white print you agreed to be responsible for that property until the debt was fully satisfied and title deeded from the bank to you (free and clear), or to a new owner. These go hand in hand, so one without the other still equals YOU! Therefore, you will still be responsible for that home in Deed or in Mortgage.

With that being said, before filing for bankruptcy, know your options regarding the property:

1. You can do a deed-in-lieu of foreclosure (giving the house back to the bank to avoid a foreclosure
2. Put the house on the market with a Realtor and sell it for a profit (if there is any equity
3. Do a short sale

However, don’t just do nothing! That will cause a “Double Whammy!” on your credit, and you definitely don’t want that to happen. For instance, there is one mortgage product out there, and their requirement regarding bankruptcy is 2 years from discharge, and a foreclosure is 5 years, so now you are seven years in the hole before you can purchase another home. You might be saying “I don’t want to own again”, but that is the frustrated, drowning in debt person talking. When things get better and you are able to get a handle on your finances, then you will be ready to start thinking again about a new home. If it takes you seven years to get back in financial shape then you will be okay, but if you kick it up a notch and get back in full swing in less than 3 years, then you will run into the first instance that I mentioned, or you will have a ridiculous interest rate, either way it goes, the “Double Whammy!!” will get you….avoid it at all costs.

Ask plenty of questions and do your homework! Seek out good legal advice and don’t be afraid to get a second opinion. Most importantly, AVOID the “Double Whammy” and only deal with an experienced real estate agent with years of knowledge. When help is needed, call Florida Auctioneers & Realty, LLC at (941) 927-8108.