Do I need to file bankruptcy after foreclosure?
As a Virginia bankruptcy lawyer, I talk to about a dozen people a month who have already lost their home to foreclosure. When we look at the credit reports together, the first mortgage usually shows foreclosed, with a balance of $0. And talk about the question, after the foreclosure, do I still need to file bankruptcy?
For some people, the answer is obvious. If there was a second mortgage on the foreclosed house–those almost always sue. Usually within a year. If the credit cards got out of control while trying to save the house, then people need to file bankruptcy to clean up the credit cards.
But what if the foreclosed first mortgage is the only problem?
Up to this point, I’ve told people I almost never see any effort by anyone to collect on those foreclosed first mortgages. (A couple months ago I saw a couple being sued on a first mortgage forelcosure. That mortgage had been a rural development loan backed by the Department of Agriculture. Don’t see much of that around here. That house had been in Culpeper County. That may be the only time I’ve seen someone sued on a first mortgage.)
That may be about to change. Bill and Janie (not their real names) came to talk to me about filing bankruptcy last week.
Bill and Janie had a collection letter for $137,000 from a company called Strategic Recovery Group. This was the mortgage deficiency on a first mortgage that had been held by GMAC. Their credit report showed “foreclosed” and $0 balance for GMAC; but now a debt collector was after them.
(The debt collector did not say they were collecting for GMAC. They said they were collecting for Fannie Mae. Most mortgage loans in the country are made by one of the big banks, but then sold to Fannie Mae, who bundles them up and sells them to big investors.)
Other than that, they had no credit problems, Each had one small credit card that was current. What to do?
Back in June, Fannie Mae put our a press release saying they were going to start taking legal action to collect on those foreclosed loans. Looked like this might be the first sign that they were doing it.
We spent a long time talking about what was the best way to go. The debt collector had not his their credit report, at least so far. And there was still no sign that Fannie Mae really was suing on these. So waiting to see what happened next was definitely an option. That was my recommendation. (Also, personally, I was curious.)
Why go ahead now? This family wanted to buy a house in a few more years. If they went ahead and file bankruptcy now, they knew they’d be back to good credit in a couple years, when they wanted to buy.
Does that surprise you? Take a look at this chart. It was prepared by the National Association of Realtors. It shows the current policies of Fannie Mae, Freddie Mac and FHA. Basically, you can have good enough credit to buy a house two years after a bankruptcy. Three years after a foreclosure.
Bill and Janie lost their house to foreclosure about a year ago. So if the go ahead and file bankruptcy now, the two years after bankruptcy and three years after foreclosure will end at about the same time. If they wait to see if Fannie or Strategic sues them for the $137,000–maybe a year and a half from now–then the two year waiting period after bankruptcy would start then. and that would put off their chance to buy a house again.
(Actually, they wouldn’t even have to sue. If Strategic or Fannie waited a year and then hit their credit report–bam–then they’d have to file bankruptcy or never get back to good credit.)
So rather than wait and see what happens next–and take a chance on ruining their credit just as it was getting good again–they decide to go ahead and file bankruptcy now.
It was a close call, but it makes sense to me. (So I still don’t know if Fannie Mae actually does follow up on its threat to start suing.)
(This is specific to Virginia law. In about half the states, they cannot sue on a foreclosed first mortgage. But in Virginia, they can.)