Lately, we have heard from many homeowners that have filed bankruptcy, and/or are considering bankruptcy, and need guidance regarding underwater properties they own. Increasingly, these homeowners are telling us that their bankruptcy attorney told them to not short sell their underwater property, and instead allow the bank to take its time to foreclose.
We find this advice alarming for many clients emerging from bankruptcy – especially for those who have a strong desire to rebuild credit scores and hope to own a home in the future. Why? Two important reasons, listed below:
First, most debtors do not realize that following a successful Chapter 7 bankruptcy, the debtor will most likely still own any underwater property. Bankruptcy wipes out the mortgage debt, but not the mortgage lien. So, the bank can (and most often will) proceed to foreclose on the property after the bankruptcy, which we all know can take years. So, from the moment the debtor is discharged from the bankruptcy, he or she, once again, takes full responsibility for ownership of the property. In other words, after filing for bankruptcy, the debtor is once again responsible for, without limitation, property taxes, homeowners/condo fees, property maintenance, code enforcement issues, permit violations/penalties, and/or personal injury to individuals who enter the property. And, the debtor will not be able to bankrupt out of any moneys due to these liabilities for an additional 7 years.
Second, immediately after a bankruptcy discharge, the debtor has an opportunity to rebuild his/her credit score, which in many cases can be rebuilt within a few years to the point of being able to obtain a mortgage loan. However, allowing property to go through foreclosure post-bankruptcy could impact the debtor’s credit score up to 200 points. So, if the foreclosure occurs three years after a bankruptcy discharge, all credit gains from the bankruptcy would be lost. A short sale is a much quicker way to dispose of the property and typically causes much less of a negative impact on credit scores.
For these reasons, we believe it is wise for a debtor who has been discharged from bankruptcy to talk to a real estate attorney to determine the best avenue to handle any property that he or she still owns with a mortgage lien. A short sale is often times the best way to accomplish this objective rather than waiting for a lender to complete the foreclosure process, which could take a substantial period of time.
As always, should you have any questions regarding any of the foregoing, please do not hesitate to contact a member of the Berlin Patten team.
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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