|Discharging your old house in bankruptcy can be very tricky
If you have had a previous bankruptcy and lost a home in the last few years, the road to getting a new loan could be treacherous. Contrary to popular belief, for the purposes of obtaining mortgage credit, you cannot discharge home bankruptcy.
Today, we’ll discuss what you must be aware of when getting a mortgage if you tried to discharge the old house.
• Chapter 7: For our purposes, we will be talking about the popular Chapter 7 bankruptcy (most common form) wherein all consumer debts are canceled. These liabilities are considered unsecured, meaning not attached to real estate. Common examples include credit cards, car loans, personal loans or installment loans. Secured debt is debt secured against real estate, such as first mortgage liens. When a house is listed under the schedule of discharged creditors, it is not canceled in the same way a consumer debt is. A Chapter 7 fully discharges all the listed consumer debt, in other words removes the obligation to pay and the debt is canceled.
• Attempting to discharge a house in bankruptcy: The debtor lists the house in a bankruptcy filing, but when the discharge occurs, the house ultimately goes to foreclosure. It does not matter if the previous home was a primary home, second home or investment property, including the house in the bankruptcy, this can lead to foreclosure, specifically a trustee sale date.
• Trustee sale date: This becomes critical if you’re seeking to qualify for a new mortgage loan. Providing the Chapter 7 discharge bankruptcy papers is simply not enough, especially if you’ve owned a previous home that was included in the bankruptcy.
Here’s where it gets technical. Because real property cannot be discharged in bankruptcy and the house ultimately goes to foreclosure, it’s critical to know two things:
1. When was the date of the previous foreclosure/trustee sale date?
2. Lender counts the “seasoning” from the most recent last credit derogatory occurrence to now.
For example, let’s say your bankruptcy was discharged January 2011, but the house listed in the discharge that went to foreclosure occurred June 2011. The lender will use the last date of the more recent credit event, the trustee’s sale deed in June 2011.
You will need to provide an explanation as to what factors led to the previous bankruptcy as well as the foreclosure and have reestablished credit. You will also need to have demonstrated an ability to manage finances since the credit event. Additionally, you’ll need to know the actual trustee sale date. This is usually evidenced with a trustee sale date then stamped and signed by the county recorder in which the property is located in. This can usually be obtained from county records or in some cases, directly with your lender as sometimes they have the ability to procure these documents directly from county records.
If prior house was listed in a bankruptcy, then the previous house is probably listed as a foreclosure on county records with the trustee sale date deed. The lender will use the foreclosure since that is the most recent derogatory credit item, and the seasoning time to get a new loan will happen from the date of the most recent last trustee sale date.
If previous house was listed in a bankruptcy, but ultimately was sold in a short sale, the lender will use the most recent last date of the short sale, whichever credit item took place last, and will need the previous grant deed-deeding the property from you to the buyers.
• Mortgage Tip: The minimum waiting time to get a loan post Chapter 7 bankruptcy is two years. The minimum waiting time to get a loan post foreclosure is three years in most circumstances with government financing, seven years with conventional financing unless extenuating circumstances occurred.
Extenuating circumstances are considered to be one time economic calamities such as death of family wage earner, job loss, reduction in income or illness.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.