Foreclosure After Surrendering Home In Bankruptcy

November 9, 2012

It is axiomatic that bankruptcy has a serious affect on your credit. But when facing a foreclosure, the federal bankruptcy laws can at least offer some credit assistance. After enduring the pain of foreclosure, you may be faced with a bankruptcy in order to discharge the house debt. You may be forced into bankruptcy when the value of the property is less than the amount you owe the bank. Consequently, you owe the bank the difference, called a “deficiency balance.” After a quick sale of the house, real estate fees, maintenance costs, insurance costs and other related expenses, the deficiency balance can be tens of thousands of dollars. The bank will sue to collect this balance. That can lead to a foreclosure and a bankruptcy on your credit report.

Thankfully, bankruptcy offers a way to minimize the damages. Filing bankruptcy before the foreclosure sale can stop the foreclosure from ever appearing on your credit report. How? Bankruptcy discharges your personal liability for the loan. When a debt is discharged, the bankruptcy court issues an injunction prohibiting the collection of the debt from the debtor. However, this limited injunction applies only to protect the person, not creditor claims against property like a lien against your house.

Lenders must generally foreclose on home in order to obtain a transfer of ownership. Foreclosure is permitted after the debtor discharges his personal obligation in bankruptcy because the foreclosure is against the property, not against the individual. The lender uses foreclosure to gain ownership of the property, but the action is not against you personally.

Any reference to the foreclosure on your credit report after discharge would be inaccurate and a violation of the federal bankruptcy court’s discharge injunction order. It should not appear as a public record, and not as a foreclosure mark on a trade line. The mortgage trade line should read “discharged” with $0 balance, not foreclosure, with no further activity past the filing date.

If you are facing foreclosure and cannot save your house, consider a bankruptcy filing to stop the foreclosure and ensure a controlled and orderly surrender of your real estate back to the bank. A bankruptcy will prevent a foreclosure from appearing on your credit report and discharge the debt once and for all.

 

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