Borrowers with little hope of seeing their property values bounce back are still deciding to walk away from their mortgages. Unfortunately, lenders often have the right to pursue these borrowers for a deficiency judgment. The good news is that bankruptcy eliminates personal liability for a mortgage deficiency. In most residential mortgages, the borrower has personally guaranteed the loan and is liable for the full amount of the mortgage.
If the borrower fails to defend the deficiency lawsuit, the court will enter judgment in favor of the bank, a remedy that often results in wage garnishment or attachment of property. Lawsuits like these commonly force consumers into bankruptcy. In the example above, filing for bankruptcy would prevent the mortgage lender from seeking a deficiency judgment after foreclosure, the remaining mortgage balance would be discharged.
The mortgage states that if you fail to pay by the terms of the promissory note, then the bank can take back your home in foreclosure. The note and mortgage also state that foreclosure is not the only remedy available to the bank. They can choose to foreclose or sue you, or in many instances, both. The bank has many options when it comes to collecting the amounts you owe to them.
The borrower, however, has limited options. One option frequently utilized to eliminate a deficiency after foreclosure is to file bankruptcy. When you file bankruptcy, a federal law kicks in called the automatic stay that prevents creditors from taking any collection action against you.
If you're behind on a house or car payment and don't want to lose the property, Chapter 13 provides a way to catch up and keep it. It always makes sense to consider bankruptcy early because, for many people, bankruptcy is inevitable.
If the deficiency is significant or you have other dischargeable obligations, this might be the right way to go. You'll want to avoid paying a debt you could have discharged erased in a future bankruptcy case. You'll also want to check whether you can protect your property with exemptions. An unexpected upside to bankruptcy is that your credit score will likely recover faster by wiping out obligations in bankruptcy as opposed to waiting years for bad debts to fall off of your credit report.
Exemption laws allow a debtor to protect certain types and amounts of property from creditors in both collection actions and bankruptcy. Exemptions vary by state but commonly include:. Most states require you to assert your exemption rights in court to prevent losing them. If you receive paperwork involving property seizure, immediately contact the sheriff, local court, or legal self-help organization to determine when you must respond. It will likely be less than ten days.
An attorney can also explain the procedures and provide advice about your case. You'll find exemption laws by state here most apply to both collection actions and bankruptcy. Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a to page bankruptcy petition, and because all rules apply in every case, you can't skip a step. The forms and resources below will help you find more information.
Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition. You'll find fillable, downloadable bankruptcy forms on the U. Courts bankruptcy form webpage. We want to help you find the answers you need. We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case.
The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer. The information provided on this site is not legal advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or will be formed by use of the site.
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