If your house has been foreclosed on, Chapter 7 bankruptcy can eliminate your personal liability for any outstanding deficiency balance. But Chapter 7 cannot get your house back.
Read on to learn more about how Chapter 7 can help you if your mortgage lender has already foreclosed on your house.
(For more articles on what happens to houses in bankruptcy, see Your Home in Chapter 7 Bankruptcy.)
Filing for Chapter 7 bankruptcy will not help you get your house back after a foreclosure.
If, however, your lender foreclosed on your home without following all proper procedures, you may have a claim for wrongful foreclosure. In that case, you may be entitled to damages or other remedies by pursuing your lender in the appropriate court (usually a state court). If you believe you have a valid wrongful foreclosure claim, talk to an attorney to learn more about your options. You can use Nolo's Lawyer Directory to find a foreclosure lawyer near you.
A deficiency balance can arise when the foreclosure sale proceeds are not enough to cover the balance of your mortgages. Whether your mortgage lender can come after you personally to collect a deficiency depends on state law.
Certain states only permit lenders a single remedy of their choice (usually a foreclosure) and do not allow a deficiency balance. However, in other states, your lender can still sue you to collect its deficiency balance after a foreclosure (these are commonly referred to as deficiency states). In many states, whether you end up with a deficiency also depends on other factors such as the number of mortgages you have and if you took out the mortgage to purchase the house initially. As a result, it may be possible for a nonforeclosing junior lienholder to sue you for a deficiency even if your first mortgage lender can’t. (To learn more, see Nolo's Foreclosure area.)
Example. George could no longer afford to make his mortgage payments so his mortgage lender foreclosed on his house. He had a mortgage balance of $300,000 at the time of foreclosure. His house sold for $250,000 at the foreclosure sale. If George’s state allows deficiency balances on all mortgage loans, his lender can come after him to collect the $50,000 deficiency.
If, under state law, your mortgage lender can collect a deficiency balance from you, it can sue you and then (if it gets a judgment) go after your other assets or garnish your wages to satisfy the deficiency.
This is where Chapter 7 bankruptcy can help you. Your personal liability on mortgage debt, including deficiency balances, is dischargeable. As a result, filing for Chapter 7 bankruptcy wipes out your obligation to pay your mortgage deficiency. This means that after your deficiency is discharged, your lender can no longer try to collect it even if you live in a deficiency state. However, prior to filing for Chapter 7, check your state’s exemption laws to make sure you can protect all of your assets in bankruptcy. (To learn more, see Bankruptcy Exemptions.)