Trouble making your house payments after a bankruptcy discharge can cause a slew of financial complications. Fortunately, lender and government-backed modification programs like the Home Affordable Modification Program (HAMP) provide opportunities to keep your home. If these programs fail, the Bankruptcy Code offers a few solutions. The right approach depends on whether you want to walk away from the debt or pay and keep your home.
If you decide to “walk away” after bankruptcy, the pressing question is whether you are personally on the hook for any of the debt. In other words, did your prior bankruptcy case discharge your personal obligation to pay the mortgage? For many, the answer is “yes,” and you can “walk away” from the home loan without repercussion. Additionally, under some state laws, a foreclosure does not give rise to a deficiency balance on a home loan, regardless whether the personal liability was discharged.
After a Chapter 7 Discharge. A Chapter 7 discharge order from the bankruptcy court discharged you from all debts that arose before the commencement of your case. If you had a pre-bankruptcy mortgage, that mortgage was included in your discharge order, unless it was excepted. The most common way a mortgage debt is excepted from a Chapter 7 bankruptcy discharge is through a reaffirmation agreement. If a reaffirmation agreement between you and the creditor was not filed with the bankruptcy court before your discharge order was entered, your personal obligation was discharged. Home loan reaffirmations are becoming increasingly rare because many attorneys advise against it and some bankruptcy courts will not approve a home loan reaffirmation agreement unless there are substantial changes to the loan that benefit the debtor.
After a Chapter 13 Discharge.
A Chapter 13 bankruptcy discharge also discharges all debts that arose before the commencement of the case, including a home mortgage debt, unless it was excepted from the discharge order. The most common way a home mortgage is excepted is when the mortgage is a long-term debt that is modified or cured during the Chapter 13 case. While some courts contend that all mortgage debts are long-term debts that survive the bankruptcy intact (meaning you are still personally obligated), other courts hold that a mortgage that is not delinquent on the day you filed bankruptcy and is not cured through the Chapter 13 plan is included in your discharge (meaning you are no longer personally obligated).
A Second Bankruptcy
If the personal liability for the mortgage debt was not discharged during your previous bankruptcy case, you may be stuck with a large deficiency balance from the disposition of your home. A second bankruptcy case may be an option. While there is generally no restrictions on a second bankruptcy case filing (there are in few, limited circumstances), the Bankruptcy Code places time limits on the availability of a subsequent discharge:
|Original Bankruptcy||New Chapter 7||New Chapter 13*|
|Chapter 7||8 years||4 years|
|Chapter 13||6 years||2 years|
*There are special rules for prior Chapter 13 cases
The above time periods are measured from the date the previous case was filed, not from the discharge date. For instance, if you filed Chapter 7 bankruptcy (and received a discharge) on June 1, 2012, then:
- on June 1, 2020 you are eligible to file a Chapter 7 bankruptcy case and receive a discharge (the Eight Year Rule); and
- on June 1, 2016 you are eligible to file a Chapter 13 bankruptcy and receive a discharge (the Four Year Rule).
Be warned, a foreclosure sale after discharge may create a tax liability. The most common of these arises from the creditor’s cancelation of the debt, commonly called a “write-off.” If a creditor cancels or forgives a debt over $600, it is required to notify both you and the IRS. The IRS considers this money income and expects you to pay taxes on it. A recent tax debt is not a dischargeable debt.
Keep the Home
As mentioned previously, there is nothing that prohibits a second bankruptcy filing, even when a bankruptcy discharge is not available. By filing a new Chapter 13 bankruptcy, you may use the benefits of Chapter 13 to strip off an unsecured junior mortgage or cure a default over three to five years. Chapter 13 may buy you time to pay an arrearage, modify your loan, or sell your home.