Foreclosure after bankruptcy

We filed chapter 7 and it has been discharged. Our mortgage loan was never reaffirmed, so its still in bankruptcy. What happens if the bank forecloses on our house? Will we be responsible for any money the bank looses? Since payments and non payments are not reported to the credit companies, would a foreclosure affect our credit? Could we short sale it, would we be taxed or any penalties? Would we have to sell the house through a lawyer and the courts?

Asked on June 26, 2009 under Bankruptcy Law, Massachusetts

Answers:

M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

Not reaffirming a mortgage obligation means that you are not personally liable on the promissory note associated with the security agreement.   The property remains encumbered by the mortgage obligation and you continue to maintain and grow your equity interest in the property.  Your title interest does not change.

The biggest difference is that you are no longer personally liable on the note.  Therefore you cannot be sued personally if you were to abandon the property and a foreclosure sale generated less than what was owed.

However there is a negative about not having personal liability.  As you, personally have no obligation to make any payments, you are not personally accessing any credit.  This means that your credit report will not reflect the payments that you do make.  As for a foreclosure and your credit, it would be reported be on your credit report but the bankruptcy is already on it and will trump any negative fallout from the foreclosure. 

As for a short sale, the problem for the borrower is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor’s liability for the deficiency.  The IRS considers forgiven debt to be taxable income to the borrower.  The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency.  Most borrowers who cannot afford mortgage payments can even less afford additional tax liability.

Quite frankly, now that the bankruptcy has been completed it already negatively impacts your credit and since there are tax consequences to a short sale, in your situation, a foreclosure is most probably the preferable choice.

If you were to pay off the mortgage, you would get the title just as you would otherwise.  You can still contact the lender to reaffirm the debt and get back into a more traditional securityinstruments (mortgage) plus  promissory note situation.  You can also sell the property as you do have title interest, and would not need an attorney or court to do so (although legal representation in a home sale is always a good idea).

Hope this answers your questions.


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