A fairly common question that is asked in my Office is what happens when a home has been taken in Foreclosure.  This section will address the Bankruptcy side of that situation. 

Pretty much everyone knows that when a car has been repossessed, the person or people who signed the financing agreement are liable for any deficiency balance once it is sold.  That same situation applies to a home that have been foreclosed, or at least it used to.  The problem, of course, has been the real estate meltdown that has led to so many homes just going back to the bank, and not even being sold at a Sheriff’s sale.

It is no secret that many people have gone a few years after foreclosure without being sued.  That fact, however, has led to a misconception that a person who loses a home in Foreclosure is somehow not liable for it.  Nothing cold be farther from the truth.

Legally speaking, a person can be sued for at least 6 years after the time they are considered to have “breached” the financing contract.  Of course, anyone who loses a home will be saying that the “breach” occurred the first time they missed a payment, while the bank will say that those 6 years begin to run as soon as the redemption period has ended after the home has been sold.

If there’s one prediction I’d bet on, it’s this:

If and when the economy in general, and the real estate market in particular recovers, and homes start selling again, there will be a rash of lawsuits over Foreclosed homes.  Even if the banks write off this debt, it can and will be sold to speculators who have bought it for pennies on the dollar, and stand to make a windfall on anything they can recover.

Bankruptcy provides a person with a way to permanently put any of these concerns out of their mind.

The beauty of Bankruptcy is that a person can completely erase any liability for a Foreclosed home at any stage of the foreclosure process, or thereafter.  This means a person can bail out of a home they no longer can afford, or otherwise just no longer want, even before they have ever missed a payment.

Of course, they can likewise get out of the whole situation once they have missed any number of payments, from the very first, to the 6th, the 12th, or even the 24th.

Likewise, once the home has been Foreclosed, and even if Sheriff’s sale has not taken place, a person can simply make a graceful exit from the situation by filing a Bankruptcy.

Even if there has been a Sheriff’s sale, and even if a person has a Judgment against them, Bankruptcy simply wipes that liability away.

Another question arises when someone has almost no debt beyond liability for a mortgage.  This question frequently comes from people who have no Credit Card bills, and wonder if they are ineligible to file for Bankruptcy because they don't have any other debt.  They ask "do I need any other debt in order to file Bankruptcy?"

And the answer is absolutely not.  Lots of people file Bankruptcy on nothing more than a mortgage for a home they have given up, or which has been taken in Foreclosure.  In many of these cases, no lawsuit has yet been filed.  The person just wants the peace of mind of knowing that any debt that could arise from that situation is erased.  And Bankruptcy does that.

Often, people are concerned about their Credit Rating as they consider Bankruptcy.  In almost all such cases, that concern is rather misplaced, as the sheer amount of debt, or potential liability on their Credit Report will be enough to prevent them from getting any new credit. 

To give a specific set of number regarding how soon a person can recover ignores the numerous variables involved in home financing.  Still, once a person filed Bankruptcy on a mortgage that was either in, or had gone through Foreclosure, there are no remaining questions of liability on that old loan.  It’s gone forever.

If someone came to you and asked to borrow a large amount of money, wouldn’t you rather that they did not have any potential liability for a huge debt that they could be sued for, and could result in a garnishment that eats up 25% of their take-home pay, thus impairing their ability to make the payments on the money they would owe you?

Of course you would.  Do you think big, institutional lenders are any different?

With Bankruptcy, it’s relatively quick, incredibly clean, and perfectly clear.  The debt is gone.