Home > Managing Debt > Can I Walk Away From My House After Bankruptcy?

Comments 3 Comments

Bankruptcy and foreclosure can each have serious negative consequences for your credit scores. But what if you experience one and then the other? Is it a double-whammy?

Our reader Brent went through bankruptcy nearly seven years ago, and did not reaffirm his mortgage. But he continued to make his mortgage payments, and is still living there. (When you do not reaffirm your mortgage in bankruptcy you can continue to live in your home as long as you make your payments. But you are no longer personally liable for the debt if you decide to leave.)

Now Brent is thinking about walking away from his home.

“I am NOT in any danger of a foreclosure,” he wrote. “My handing the house back over to the mortgage company would be strictly voluntary. The reason I’m pondering doing so is the housing market where I live is still pretty depressed, houses sit on the market 6 months to a year and if I do sell chances are it would end up being a short sale. So what are the consequences of handing the house back over to the Mortgage Company after the debt has been discharged under chapter 7 of Bankruptcy court?”

Brent is right to be concerned. If he walks away the lender will have to take steps to regain possession of the home so it can dispose of it. That is usually accomplished through a deed-in-lieu of foreclosure, a foreclosure or a short sale.

If a foreclosure or other negative information about his mortgage were to be reported now — years after his bankruptcy — it could extend the time that it takes him to rebuild credit and might even affect how soon he can get another mortgage. (More on that in a moment.)

But Brent, and others in his situation, may be in luck. Letting the house go should not further impact a consumer’s credit scores if they did not reaffirm their home loans, says Robert Weed, a Northern Virginia bankruptcy attorney. “Their credit reports should show bankruptcy and nothing since then. Nothing if you pay and nothing if you don’t pay,” he says. That’s because when these homeowners did not reaffirm their home loans, he explains, “it stopped being a debt when you filed for bankruptcy.”

Furthermore, Weed believes a bankruptcy is better than a foreclosure. That’s because when your bankruptcy is done you don’t owe the money anymore, but with foreclosure you may still be sued — in most states — for a deficiency. That’s one reason why consumers who can’t afford to pay their mortgages should at least explore their options with a consumer bankruptcy attorney.

Of course there is the possibility that information will be reported incorrectly, in which case the consumer will have to dispute the mistakes on their credit reports.

On the flip side, we’ve heard from consumers who are frustrated that their mortgages do not appear on their credit reports after bankruptcy because they did not reaffirm them. But the benefit of having your mortgage reporting on your credit reports may be outweighed by the risk that you take by agreeing to continue to be personally responsible for the loan. If you can’t pay the loan in the future, you could wind up in foreclosure — or even in bankruptcy again. Again, this is a discussion you’ll want to have with an attorney.

What if Brent wants to buy a house? Will the fact that the home goes into foreclosure in the near future push the date he can finance another home off a few more years? That used to be the case, says Weed. Lenders often follow Fannie Mae guidelines which specify the time period that must elapse between a foreclosure and a new loan, and it used to be that date was measured by the date of the foreclosure. But last year, Fannie Mae clarified that if there was both a bankruptcy and a foreclosure on the same property, the bankruptcy time period may be used. The guidelines say:

If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting periods may be applied if the lender obtains the appropriate documentation to verify that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting periods must be applied.

After Bankruptcy or Foreclosure 

Anyone who goes through a serious credit crisis that leads to bankruptcy or foreclosure needs to start the process of repairing their credit as soon as the crisis has passed. The sooner you start, the sooner you’ll see progress. Here is a helpful guide to rebuilding credit. Review your credit reports on an annual basis, at a minimum. You can monitor your progress by tracking your credit scores for free on a monthly basis at Credit.com.   

“What you want to do is to work really hard to get back to good credit,” says Weed. Consumers who have been proactive on that front will have greater options. “You can can look around and ask what kind of house can I afford and how does that compare to the deal I’m in?” he says.

More on Managing Debt:

Image: Wavebreak Media

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • JacquelineDay

    I filed for Chapter 7 bankruptcy that was discharged in March 2012. Among the items discharged was my residence- I did not reaffirm. I am currently in the house and have been set up on a loan modification. However, due the the mishandlings of my Mortgagae and/or note, the amount the Mortgage company shows I am in arrears is grossly miscalculated. I have tried for over 3 years now to get it straightened out, but after dealing now with the 4th bank (yes they keep selling it), I have decided I would rather walk away than to fight anymore. How can I get my name off of the title (which is what every lender I’ve spoken with states must happen before I begin my ‘waiting period’) without harming my credit further?

    • Jeanine Skowronski

      HI, Jacqueline,

      You may want to consult a consumer or bankruptcy attorney to find out what your options here are.

      Thank you,

      Jeanine

  • Robert

    Just to confirm, if the house was not reaffirmed in bankruptcy then there cannot be a foreclosure correct? The bank just assumes possession? If I want to buy a new house two years after bankruptcy, my current home is underwater and/or unsellable, will walking away from the one hurt the other?

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team