What Can Bankruptcy Do if My House Is Already Foreclosed On?
Bankruptcy will NOT get your house back. However, bankruptcy could help eliminate debt related to your previous mortgage and home.
Although Chapter 7 will not help you recover your home, it can help in other ways after a foreclosure. If you owed a deficiency balance, Chapter 7 may get rid of that debt. It can also get rid of insurance debts related to your mortgage or other bills and utilities that were left unpaid. Chapter 7 is also referred to as liquidation. However, in most cases, there is no property to liquidate. Chapter 7 is used by people who could no longer pay their debts, including mortgage deficiencies. It helps people get a fresh financial start.
Mortgages and Deficiencies in Bankruptcy
A number of states do not allow mortgage companies to recover a deficiency balance if your home is foreclosed on. These are sometimes referred to as non-recourse loan states. For example, in California, if a mortgage company pursues non-judicial foreclosure, they cannot pursue you for a deficiency balance. However, if the loan is a recourse loan, then they could pursue you for the deficiency, even in California.
Some loans are turned into recourse loans when you refinance or modify your loan. In these cases, filing a Chapter 7 could eliminate that deficiency balance.
If you do not qualify for Chapter 7, another options is to file Chapter 13. Chapter 13 can help create a plan to pay all or some of the deficiency balance, while eventually receiving a discharge of the remaining balance. Chapter 13 is a payment plan for 3 to 5 years. It helps people who make more than the average income family to get out of debt.