Bankruptcy Homes

Bankruptcy Homes

Definition

These homes are lost by their owners through bankruptcy. As a part of the bankruptcy agreement, these homes are seized and then are sold by the creditor to pay off debts.

What Are Bankruptcy Homes?

Many people experience some kind of financial devastation during their lifetime. Often, bankruptcy is one of those events that a person would rather leave in their past. However, bankruptcy can continue to affect your life for years to come.

Bankruptcy is a process that can be used by consumers or businesses. It involves eliminating or repaying debts while under the umbrella of federal bankruptcy court. Chapter 7 bankruptcy wipes most debts clean, while chapter 13 allows for a repayment process.

There are many different kinds of debts that can be involved in a bankruptcy. One of those is real estate. Many times, property is sold during bankruptcy as a way of paying down debt. However, there are some circumstances where a person is able to keep their home even after going through bankruptcy. There are a couple of factors that come into play including whether or not a person is up to date on their mortgage payments. The court will also look at how much equity in individual has in their home and how much of that equity may qualify as exempt.

Under Chapter 7, bankruptcy properties may be able to be be saved by the homeowner for a short period of time before becoming bankruptcy properties for sale. If the court has the seize the asset during a bankruptcy, the lender may end up with these houses in bankruptcy and be forced to sell them off.

Will All of My Debts Be Canceled in Bankruptcy?

One surprising fact that many people don't realize is that not all debts will be canceled in bankruptcy. For instance, some secured debt such as car loans will be treated differently than credit cards. This is because there is an item being used as collateral for the loan. In the case of a car loan, you'll have the choice of paying your payments as agreed or returning the vehicle to the creditor. You could also pay the creditor one amount equal to the replacement value of the car. Certain types of secured debts are allowed to be wiped out during Chapter 7 bankruptcy.

There are other debts that are not wiped out in bankruptcy including alimony, child support and the majority of tax debts.

When real estate gets involved in bankruptcy, it is certainly considered to be a secured debt. If the homeowner cannot make the payments, these bankruptcy homes for sale go back to the lender for liquidation. Sometimes this means that the new buyers find these homes in bankruptcy for sale and get them for pennies on the dollar.

How to File for Chapter 7

In order for an individual to be able to file for Chapter 7 bankruptcy, there are certain factors that must be met. For instance, there are income levels that cannot be exceeded. In addition, the court will look at any previous bankruptcies you have filed within a particular time period. If there is any indication to the court that you're simply trying to get out of your obligations, the bankruptcy will be denied.

New bankruptcy laws went into effect recently that dictate whether a person is eligible for Chapter 7 bankruptcy or must use a repayment plan under Chapter 13 bankruptcy. The people who get passed immediately to Chapter 7 bankruptcy include veterans who had debt pileup during active duty and people who accumulated debt mainly because of operating a business.

Most people speak with a bankruptcy attorney before filing to make sure that they are eligible and making the right decision for their personal financial situation. There is a specific equation involved that differs from state to state, so it's important to get experienced legal advice before filing for bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is simply a repayment plan they usually occurs over a 3 to 5 year time period. Instead of having debts wiped clean, as in Chapter 7 bankruptcy, a Chapter 13 is mainly known as a reorganization of your finances. Again, not everyone is eligible or a good candidate for Chapter 13. The court will have to be given proof that you are able to pay off your debts under such a repayment plan. If your income is under a certain amount or is irregular, the court may not allow you to go through with a Chapter 13 plan.

Eliminating Tax Debts in Bankruptcy

Although you often hear promises the tax debts can be eliminated in bankruptcy on late-night TV commercials, this is often not the case. Most of the time, tax debts will still be there after a Chapter 7 bankruptcy or you will be required to repay those debts under a Chapter 13. The odds are better of getting rid of tax debts under Chapter 7, however.

Only certain tax debts will even qualify if particular conditions are met. For instance, the only kind of taxes that even have the option of being wiped clean would be income taxes. You have to prove that there was no fraud or evasion involved and that the debt was a minimum of 3 years old. You also have to prove that you did file a tax return at least two years prior to filing for bankruptcy.

Federal tax liens can never be discharged under a Chapter 7 bankruptcy. Although you may not be personally obligated to repay the debt, the IRS may have placed a lien against your home before the bankruptcy. These liens will not be wiped clean under a Chapter 7.

FAQ about Bankruptcy Homes

  • You can find bankruptcy homes in a variety of places, including real estate agencies and newspaper listings. The best method, however, is via the internet. Conduct a simple foreclosure listings search on foreclosuredeals.com to find bankruptcy homes by city and state. More >>

  • First, ask yourself this question: What kind of bankruptcy are you filing? If it is Chapter 13 bankruptcy, you should file before foreclosure – because this type of bankruptcy allows you to keep your home. More >>

  • In most states, filing a bankruptcy doesn't automatically prevent foreclosure. Chapter 7 bankruptcy can delay the process, but foreclosure can still take place. Chapter 13 bankruptcy may be the better option in this case. More >>

  • When you discharge your mortgage loan (most often through a Chapter 7 bankruptcy), the bank essentially receives the property and it has to cease collection efforts. This is the same end result as a deed in lieu of foreclosure, but the process is not the same. More >>

  • The amount of time you have to wait before purchasing another house with financing after having a foreclosure discharged in bankruptcy depends on the type of loan you want to pursue, as well as the lender you are using and whether or not you are trying to get your loan backed by a guarantor. For example, if you want to obtain an FHA-insured loan, you will have to wait two years after the bankruptcy discharges your foreclosure (if you have a Chapter 7 bankruptcy; for a Chapter 13, the time is one year). Most lenders use a three-year window; some refuse to lend to these individuals until four or five years after the foreclosure. Plus, lenders often will charge additional fees or interest points. Note that this applies to financing only; you can purchase any home with cash at any time you wish.

  • A deed-in-lieu of foreclosure is a method of avoiding foreclosure by signing over legal possession of the property to a lender in exchange for an agreement that the lender will not pursue the remainder of the loan at any future date. After signing, a homeowner will receive a form stating that the debt is cancelled, and a waiver to the right to pursue a deficiency judgment (the remainder of your debt). One of the main responsibilities is to vacate the premises in an orderly and reasonable manner. The other main responsibility is to pay any income taxes owed to the IRS as a result of the agreement. Forgiven debt is treated as income by the IRS; this means that you could be liable for the taxes owed on the amount that was forgiven. Under the Mortgage Debt Relief Act of 2007, though, homeowners can exclude this income from tax consideration if the debt comes from their principal residence. Consult with a real estate or tax attorney before entering into a deed-in-lieu of foreclosure.

  • No, you are not liable for taxes on the difference between what the home sells for (assuming it is later sold by the bank) and what you owe. This is because the amount you owe is cancelled by the bank in exchange for you agreeing to surrender legal possession of the property. What the bank does with the home after you sign the agreement and vacate the premises is none of your concern, even if there is a deficiency (a deed-in-lieu of foreclosure is also accompanied by a waiver to the right of a deficiency judgment). It is possible that you will be liable for the taxes on the amount of debt that is cancelled, though, because the IRS treats forgiven debt as income. It is best to consult with a qualified tax attorney or real estate attorney before entering into a deed-in-lieu of foreclosure so you can verify any tax liability that you may face.

  • Yes, you can purchase a home with a foreclosure in your credit history. If you are paying cash, credit history does not apply; if you are depending on financing from a private lender, the foreclosure on your history will play a role in whether or not they decide to lend to you. Lenders have that discretion, and virtually all reputable lenders will be reluctant to lend to anyone who has a foreclosure still on a credit record. Foreclosures remain on a credit history for seven years after the foreclosure is finalized, but after the seven years, the foreclosure falls off the credit report. Additionally, getting your loan guaranteed by the VA, FHA, or other agency may be impossible unless there has been an amount of time lapsed from the date of your foreclosure (typically 2-3 years, depending on the agency and the circumstances of your foreclosure). The best way to know for sure is to ask your lender; there is no danger of informing your lender of information that would jeopardize your application because they will have access to your credit history (and if it has been more than seven years, it won't show up).

  • Yes, it is possible to place a lien on a home that is currently in foreclosure. The lien is a claim you make on the property to pay off any debt that you are owed by the homeowner. It does not have to be from a loan that is secured by the property itself; it can be a mechanic's lien, or a claim to pay for any personal damages or property damages for which the homeowner is liable. Typically agreements need to be in writing in order to be enforceable. A lien of this nature is not a primary lien, though; in foreclosure, that belongs to the holder of the mortgage (or the government in the event of a tax lien). Your lien may not have priority over that lien, and there may be other liens to be paid ahead of yours. That means you may not receive any compensation from the foreclosure because creditors ahead of you will be paid first.

  • A home that is foreclosed must have its property taxes paid by the owner - which is the bank, in this case. As long as the foreclosure has not been finalized and the homeowner remains in possession of the home, he or she is responsible for property tax. Once the foreclosure has been carried out, the bank then has to pay property taxes. One exception is with tax lien certificates. If a tax lien has been placed on the property due to delinquent property taxes, the person who owns the tax lien certificate (sold usually at auction) will be liable for paying for the amount representing by the certificate. Then, if the homeowner does not pay property taxes from that point, the tax lien holder takes possession and pays future property tax. Most of the time, though, the bank will pay property taxes until the home is sold at auction. This creates an incentive for the bank to seek to sell the foreclosure as quickly as possible.

Go to the Foreclosures FAQ page

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