I need a plan... My husband and I received our Chapter 7 bankruptcy discharge in January. The possibility of divorce is likely. We owe $250K on the house and we have a $50K HELOC. The county has the house assessed at $242K.
We are current on payments; however, finances are very tight and we are currently paying interest only on the HELOC, we are soon to be faced with P&I payments which we will not be able to afford. If we let the house go into foreclosure, what happens to the HELOC? Would a short sale be a better alternative? What happens to the HELOC in a foreclosure or short sale?
We continued to make payments, but did not "reaffirm". As I understand your response, we are no longer obligated to the debts; therefore, the banks (inc. the HELOC) cannot sue us after a foreclosure. It would seem, then, that a short sale after bankruptcy would not make sense since our credit is already ruined.
Chapter 7 Bankruptcy Attorney
If your loans against the house were incurred prior to filing your Chapter 7 bankruptcy, your personal liability for those loans has been discharged. This means you can walk away from the home without ramification, as you are no longer "required" to make the mortgage payments. This assumes you did not "reaffirm" either loan.
You will still be liable for utilities and likely any homeowners' association debts incurred AFTER your bankruptcy case was filed until you are taken off title. You may want to see if the bank will give you "cash for keys" and quit claim the property back to the lender. Or, you might entertain a short sale. If you are insolvent, there will probably be no tax issues concerning a short sale or foreclosure deficiency, but I'll leave that question to your tax adviser. I hope you find this information helpful.
In some areas of the US, you could file a Chapter 13 and lien-strip your 2nd mortgage.
You wouldn't receive any benefit as a result of either a foreclosure or short sale unless you work as a realtor and are entitled to a sales commission.
Your Chapter 7 bankruptcy discharged your legal obligation to pay these debts. Now what you have to decide is whether you want to try to keep the property without the 2nd mortgage.
Hope this perspective helps!
Financial Markets and Services Attorney
Since your house is so far underwater, it is probably best to find other living arrangements, walk away, and let the bank foreclose. The HELOC lender will get nothing... which is none of your concern since your obligation to them was discharged in the Chapter 7.
Like you said, there really is no reason to go through a short sale in your situation. That's a headache you do not need in your life.
The information provided here should not be taken as a substitute for legal advice from retained local counsel. Mr. Basmaji does not intend to create nor does he consent to a formation of an attorney-client relationship with anybody, including the question poster, just by virtue of posting information on this website. If you are in need of legal advice, you should consult and retain local legal counsel.
Different mortgage brokers have different opinions regarding whether a short sale has any different effect on your ability to get a mortgage in the future than a foreclosure. Some suggest that you may qualify for a mortgage 3 years after a short sale and won't qualify until up to 7 years after a foreclosure. Other mortgage brokers indicate that there is no difference in treatment between a short sale and a foreclosure.
Apart from this possible difference, there is no benefit to you from doing a short sale instead of simply allowing the foreclosure of the loans. If you did not reaffirm the debt after the bankruptcy, the bank cannot seek payment from you in either event.
You can reach Harkess & Salter LLC at (303) 531-5380 or info@Harkess-Salter.com. Stephen Harkess is an attorney licensed in the state and federal courts of Colorado. This answer is for general information only and does not create an attorney client relationship between Stephen Harkess or Harkess & Salter LLC and any person. You should schedule a consultation with an attorney to discuss the specifics of your legal issues.
As a side note, I read recently that damage to one's credit score is about the same for a foreclosure and for a short sale. So for debtors out there thinking there is a credit-score benefit to short selling, this publication says forget it.
And according to a large bank's counsel here in Ohio, most banks in states where deficiency judgments are permitted aren't much interested in pursuing them right now. So, it appears that setting up a short sale is a lot of work that, in the end, only benefits the real estate salesperson and the bank.
All of the answers you have already received are good answers. If you were discharged and you did NOT re-affirm, then you don't owe the money but the banks can foreclose on your home. You could strip the 2nd and stay in the home by just paying the first however depending on the amount past due and your financial situation this may or may not be feasible. Also with a divorce likely this may or may not be an option.
A short sale is not going to help either one of you except perhaps requiring you to leave the home earlier than you would have to if you just let the bank foreclose.