Bankruptcy with Short Sale or Foreclosure Confusion
Countless times, I have had a homeowner say to me “Oh, I filed Bankruptcy on the home and my attorney said I could just walk away, because I don’t own the home any more.” Now I am not sure if this is a misinterpretation on the part of the homeowner or the attorney. Disclosure, I am not a Bankruptcy Attorney nor do I want to interpret BK laws, however I have had numerous Bankruptcy / Short Sale transactions and the purpose of this is just to merely help the homeowner understand the effects that a BK will have on their home.
When you file BK, depending on the type of BK you file, your debt is either forgiven or settled with a repayment plan. You basically don’t owe anything on the loan, as long as you did not “reaffirm the loan” the lender can no longer collect the payments from you because you have be “forgiven of the debt”.
However, and this is where the confusion is, you still own the home. Bankruptcy does not remove the borrower from the title on the property. Even if your BK has been discharged. There are only a couple of ways to transfer title of real property, that is through a real estate sales transaction or the property goes through legal action such as aTrustees sale or Judicial Foreclose. From the day your BK is discharged, for as long as the borrower is on title, the homeowner is responsible for the home, homeowners insurance, HOA fees, any fines and could possibly be responsible if someone gets hurt at the property. Even if the borrower decides to walk away and not pay another “courtesy payment” to their lender; until the lender decides to take the legal action to foreclose, the property belongs to the homeowner.
Remember the BK, releases you from the loan, there is still a lien on the home and title is in your name. We have seen homes sitting for up to 4 years, after a BK has been filed on the loan. Why is this? Could be a number of reasons, here are a few examples we have seen. One, the loan is now moved to a legal status at the lender. The lender’s attorney’s now have to be involved in the transfer, because BK courts, trustee and judge have to sign off or approve the foreclosure. Basically a BK adds red-tape to the process. The lenders do not want to foreclose on a property that is “protected” in BK still.
We have also seen a BK that was discharged 3 years previously, however it was not closed through the trustee courts. For whatever reason, the file remained open and the lender did not have legal rights to foreclose on the home. However we were able to close the short sale within 5 months from taking the listing.
Also, most lenders are not in any hurry to foreclose on properties. They know that Short sale yields a higher return. If the home is in BK, we work with the BK attorney and the trustee to get the proper releases from the courts so the lender doesn’t have to. They simply have their attorneys review the documents and we proceed to closing.
Another factor affecting the borrower is time frame to purchase a new home. Many loan programs are open to borrowers 2 years after BK. However, the foreclosure time frame is 5 years and short sale in as soon as 2 years. If the lender takes 2-3 years to foreclose, then the borrowers waiting period, which starts from the date the home was foreclosed on, now the borrower could be looking at a 7-8 year wait to purchase a new home.
So just remember when your BK attorney tells you “you don’t OWE the lender anything” it doesn’t mean “you don’t OWN the home”. You are still responsible until title is properly transferred from your name.
