debt

Can I lose homes in bankruptcy?

Justin HarelikQuestionDear Bankruptcy Adviser,
I have two properties in my name. Right now, I am in a difficult situation with making my mortgage payments. If I file for bankruptcy, can I lose both houses?
-- Luis

AnswerDear Luis,
Quite often, I need more information to answer these questions. That is the case here, but I can try to give you some guidance. Filing for bankruptcy will likely not cost you the property, but failing to pay the mortgage would.

There are three ways to lose a property based on your question: one outside of bankruptcy, one while inside bankruptcy and one as a hybrid of the two.

Scenario 1: Outside of bankruptcy

The first way to lose your property is to stop making payments. The lender will send you letters requesting payment and may ask whether you want to apply for a loan modification. If you don't apply for the loan modification and ignore the letters, your property will go into foreclosure. Depending on the state in which you live, you could be liable for some of the mortgage balance after the completion of the foreclosure sale.

Scenario 2: Inside of bankruptcy

The other way to lose a property is by filing Chapter 7 bankruptcy when the property has more equity than you can protect. When the case is filed, the court assigns a trustee to review your paperwork. If the trustee's investigation reveals your property has more equity than can be protected, he or she will sell the property to pay your creditors.

Before filing bankruptcy, you ought to know whether this scenario is likely to happen. You do not want to lose your property because you erroneously believed the property would be protected in bankruptcy.

Scenario 3: Hybrid, inside and outside of bankruptcy

This is very complicated, but I want to try to explain it because this has been a very common process since the real estate crisis began.

In the past few years, people who are underwater on their homes will file bankruptcy near or on the eve of a foreclosure sale. The majority file for Chapter 7 bankruptcy protection. The filing stops the sale of the property -- but not forever. The lender will file the appropriate motion with the court, allowing the property to be removed from bankruptcy protection to complete the foreclosure process. Typically, the bankruptcy filing will stop the foreclosure sale for a period ranging from six weeks to several months.

The borrower files the bankruptcy to buy more time in the property, to resolve any potential liability that may exist if the property is sold in foreclosure or to attempt one last loan modification with the lender.

It is important to understand filing bankruptcy to temporarily stop the sale will not protect the property forever. While some people do this with the hopes of applying for one more loan modification, the vast majority simply buy themselves a little more time before moving on.

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