debt

Foreclosure case may not demand bankruptcy

Justin HarelikQuestionDear Bankruptcy Adviser,
I purchased a home and then refinanced it. But I lost my job and let it go into foreclosure. There is a first and a second mortgage. I decided to move to a rental property I also own. It's very cheap and I can afford to live there and pay that mortgage only. Can the bank go after me for a judgment if the foreclosure sale is for less than the mortgage on my former home? Can I do a bankruptcy filing and still save the home that I live in now?
-- Jane

AnswerDear Jane,
I think it may be possible to do exactly as you plan, perhaps without the need to file bankruptcy at all. Unfortunately, I don't have all the relevant information, so I cannot say for sure. But I will explain your options.

First, I must explain the two types of foreclosure, and then I can discuss when bankruptcy might be necessary.

Foreclosure

There are two types of foreclosures: judicial and nonjudicial. The 50 states are split almost 50-50 between judicial and nonjudicial foreclosures.

In judicial foreclosure states, the lender must complete a foreclosure through the courts. In effect, the lender is getting a court judgment ordering that a property be sold to repay a debt.

The problem for a homeowner in a judicial foreclosure state is that the lender may have the right to go after the homeowner if the property sells for less than is owed. For example, the property is sold for $150,000, but the loan was for $200,000. The homeowner could be liable for the difference even after losing the property.

Other states practice what is called nonjudicial foreclosure, or NJF, which is conducted outside the court system. The lender, via a trustee, sells the property to the highest bidder. After the sale, the lender generally doesn't have the right to come after you for any shortfall. (However, I cannot say with certainty that every NJF state is the same.)

But even in an NJF state, you may still be liable on any junior lien that did not get paid from foreclosure sale proceeds. So if you have a first and second loan, and the first lender forecloses, you could be liable on the second.

A competent real estate or bankruptcy attorney could determine your liability for you.

Bankruptcy

Once you determine whether you face any post-foreclosure liability, you can consider bankruptcy. Unless you are liable on the mortgage deficiencies, bankruptcy might not be necessary. You may be able to simply move into the other property, let the first property go into foreclosure and start fresh in your new residence.

If you do proceed to bankruptcy, the time to file bankruptcy will depend on numerous factors. First, you need to know whether you qualify for bankruptcy based on your income, expenses and current assets. These issues should be explored prior to executing your "house-swapping" plan.

When people ask this type of question, usually the goal is to file a Chapter 7 bankruptcy. That is known as a fresh start bankruptcy, in which you wipe out your liability on the debt and keep your other assets. If Chapter 7 is not available to you, you might be able to file a Chapter 13 bankruptcy, which is known as a reorganization bankruptcy.

As you can see, you ought to consult with an attorney to determine your potential liability. While your plan appears sound, you don't want to blindly execute it without as much information as possible.

Ask the adviser

To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "Bankruptcy" as the topic. Read more Bankruptcy Adviser columns and more stories about debt management.
 

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