Should I File for Bankruptcy After a Foreclosure?

Once you miss one or two mortgage payments, it can be very difficult to catch up on the payments to prevent foreclosure. Mortgage companies make it more difficult by adding late fees and other costs. Many also demand that you catch up on the payments in one lump sum.

For some individuals who get behind on their mortgage, signing their property over to the bank or allowing the bank to foreclose is the only alternative. But should you file for bankruptcy after a foreclosure?

What Is Foreclosure?

Foreclosure is a legal process lenders use to get the title to real estate when a borrower falls behind on their mortgage payments. In other words, it's when your house is seized because you haven’t paid. The lender can then sell the real estate to pay the debt.

Lenders are allowed to do this because a mortgage is a secured debt. This means the creditor has a lien on the property that “secures” the debt owed by the borrower. A lien allows the creditor to take your property if you don't pay the loan payments. Examples of secured debts include mortgages and car loans.

There are two different types of foreclosure lenders can use: judicial and nonjudicial.

Judicial foreclosure is a court process lenders can use to take a home when the homeowner doesn't make the payments. In a nonjudicial foreclosure, lenders don't have to file a lawsuit to take a home when borrowers don't make their payments. In both cases, the home is usually ultimately sold at a foreclosure sale or auction, and the proceeds are used to repay the borrower's debt.

Often, the sale of a home helps to repay some, but not all, of the debt the borrower owed. When this happens, many people consider filing for bankruptcy to erase the remaining debt and get a fresh start.

You need to check your state’s foreclosure laws.

States set foreclosures laws, and these laws can vary greatly from state to state. So you need to check your state's foreclosure laws to determine the exact steps the mortgage company must take to foreclose on your mortgage. If you're unsure of your state’s foreclosure laws, you may want to consult with an attorney. Some states give property owners a short time to catch up on their mortgage payments to reinstate the loan. Other states have a redemption period after the foreclosure sale.

It's important to understand the foreclosure laws in your state. You may also have one or more defenses to a foreclosure action that could stop the foreclosure.

What Is a Judicial Foreclosure?

Foreclosure laws vary by state. In most cases, the first step in a foreclosure is for the lender to notify the property owner that they are in default on the mortgage. They do this by sending a notice of default. Defaulting on a mortgage usually means that you didn't pay the mortgage payment on or before the due date. There are also other ways an owner can default on the terms of the mortgage. For example, if you fail to keep insurance on the property, you're typically in default of the terms of your mortgage.

Many homeowners don't realize that if they're one day late making their mortgage payments they're technically in default. They mistakenly believe that so long as they make the payment before a late fee is added they aren't in default. The time between the due date and a late fee being added is a grace period. This is a period of time that the mortgage company gives the homeowner to pay before it assesses a late fee or reports the payment as late to the credit bureaus.

Most mortgage companies don't begin sending notices of default for several months after you begin missing mortgage payments. State laws and the mortgage company's policies dictate when the lender may issue this notice. Most lenders call the homeowner or send letters requesting payment before issuing a notice of default. Once the lender sends you a notice of default demanding payment, the lender typically gets an attorney and begins the foreclosure.

Steps in a Judicial Foreclosure

If you've received a notice of default from your lender, the lender must then follow several steps to complete a judicial foreclosure.

The lender files a complaint. A judicial foreclosure begins when the lender or its attorney files a foreclosure complaint with the clerk of court in the county where the property is located.

The homeowner responds. The homeowner has a specific number of days to respond to the foreclosure complaint. Most states require responses to be filed with the court 20 to 30 days after the complaint is served on the homeowner. If the homeowner fails to respond to the foreclosure complaint, the mortgage lender files a notice of default and a request for a hearing. The court then schedules the foreclosure hearing and notifies the homeowner of the hearing date and time.

There's a foreclosure hearing. At the foreclosure hearing, a representative for the mortgage company testifies about the terms of the mortgage and the homeowner’s default of the mortgage terms. The judge typically enters a judgment in favor of the mortgage company if the company has filed all the necessary documents and provided evidence of the mortgage lien and the default.

There's a foreclosure sale. The court schedules a date for the property to be sold at an auction. Typically, foreclosure sales are held once a month. Most states require mortgage companies to advertise the foreclosure sale in the paper for one to three weeks prior to the sale. At the foreclosure sale, the court offers the property to the highest bidder. The mortgage company may bid on the property, or a third party may purchase the property. The winning bidder receives a deed signed by the judge transferring title to the real estate to the bidder.

The homeowner must leave. If the homeowner hasn't vacated the premises, the new owner can request the judge to issue an order requiring the person to leave the premises immediately. The new owner may immediately change the locks on the home as well.

What Is a Nonjudicial Foreclosure?

In some states, the mortgage lender may acquire the property through a nonjudicial foreclosure. A nonjudicial foreclosure action doesn't go through the courts. Each state that allows nonjudicial foreclosures has specific laws that dictate how the home must be sold at an auction.

Steps in a Nonjudicial Foreclosure

The homeowner receives a notice of default. In most cases, you receive a notice of default from the mortgage company. Some states allow the company to combine the notice of default with the intent to foreclose. In a few states, the notice to the homeowner may be accomplished through publishing the notice and posting the notice on the property.

There's an auction. Once the mortgage company complies with state law for providing a notice of default and notice of sale, the property is scheduled for an auction. As with a judicial sale, a third party may purchase the property at the auction or the lender may acquire title to the property.

The homeowner must leave. You must vacate the home or the new owner can evict you from the premises.

What Is a Foreclosure Deficiency Judgment?

If the sale proceeds aren't enough to pay off the mortgage debt, you may still owe a balance to the mortgage company. This is called the deficiency balance. A deficiency is the difference between the amount owed to the mortgage company and the amount the mortgage company received from the foreclosure sale.

If the mortgage company doesn't receive full payment of the amount you owe on the mortgage loan, it can request a deficiency judgment. The deficiency judgment is a personal judgment that attaches to any other real estate that you might own. In addition, some states allow judgment holders to garnish wages or take other actions to collect a judgment debt.

For homeowners who've just lost their homes, a deficiency judgment is another debt that they can't pay. If the mortgage company is allowed to garnish your wages, this can cause substantial hardship that can impair your ability to pay for even your basic living expenses.

Should I File a Chapter 7 Bankruptcy Case After Foreclosure?

You may wonder why you would want to file a Chapter 7 bankruptcy if you've already lost your home or you can't afford to keep your home. The answer is that deficiency judgments are dischargeable in bankruptcy. So filing a Chapter 7 bankruptcy case can eliminate the deficiency judgment. Along with that, it can also stop wage garnishments and other collection efforts by the mortgage company.

Furthermore, if you have lost your home, you're likely struggling with other debts that you can't pay. A Chapter 7 bankruptcy case discharges many unsecured debts including, but not limited to:

• Medical bills

• Credit card debts

• Personal judgments

• Some old tax debts

• Old rent and lease payments

• Old utility bills

• Personal loans

Creditors are prohibited by law from taking any action to collect a debt when that debt is discharged in bankruptcy. The creditor isn't permitted to call the debtor, send collection letters, garnish wages, or file collection actions for a discharged debt. If a creditor violates the discharge, the creditor could be fined by the bankruptcy court.

Let's Summarize...

Although it won't help you keep the house, filing Chapter 7 bankruptcy after a foreclosure can still make sense if you have other debts you're struggling with. It may even pave the way for you to purchase a new home in the future.