In bankruptcy? Pay mortgage to keep home

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Dear Bankruptcy Adviser,
I have filed for bankruptcy. I did not reaffirm my loan and now find I cannot pay the first and second mortgages. It is just too much for me now. Can I walk away from my home? What will I be responsible for?
— Dorothy

Dear Dorothy,
Congratulations if you’ve successfully completed your bankruptcy or simply made the difficult decision to file. But, it’s disheartening to hear that you cannot afford your home payment anymore. Make sure that you do not give up on all attempts to modify your mortgage. Lenders are not acting consistently at all right now. Some of my clients have been rejected numerous times for loan modifications only to get approval after filing for bankruptcy. It is truly not hopeless.

Yes, you can walk away from the house because you did not reaffirm the debt. The liability on the debt will be eliminated by your successful bankruptcy. However, the liens that are attached to the house have not. To keep the house, you must make the payments, but you can walk away from the house and owe nothing to the first and second mortgage lender.

There is one exception, homeowners association fees. If you owe HOA fees, then all the fees owed prior to the bankruptcy filing are included and eliminated in your bankruptcy.

However, HOA fees owed after filing must still be paid. While most HOAs are unaware of this, some do know that post-bankruptcy filing dues are collectible. You must do all you can to pay post-bankruptcy filing HOA fees until the property is officially out of your name.

If possible, try to sell the property and avoid bankruptcy and foreclosure on your credit report. If you’re considering a short sale to avoid foreclosure, there is no bright-line rule regarding which is better for your credit. But future home-loan lenders might be more inclined to work with you after a short sale. Some lenders require you to wait five years post-foreclosure but if you execute a short-sale, you could be in a new property in less time.

But beware. While a short sale of the property might be a good idea, you need to be very careful. Many junior lien holders — the second, third or subsequent mortgage lenders — are requiring that you sign an agreement to pay back the junior lien in exchange for that lender signing off on the short sale. If you have successfully eliminated your obligation to pay on these debts with a bankruptcy, don’t compound your precarious financial situation by agreeing to pay on these loans now.

I hope your situation improves and truly hope you can keep your home. Do not end all attempts to modify your mortgage as lenders are acting oddly. I wish you the best of luck.

Read more Bankruptcy Adviser columns and more stories about debt management.

To ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “Bankruptcy” as the topic.