Personal Bankruptcy Story Questions
These excerpts were taken from a personal bankruptcy story as blogged on a bankruptcy forum website on March 1, 2012: “Our Chapter 7 bankruptcy was discharged several years ago. We did NOT reaffirm our mortgage at the time, and have been paying on time and living in our home since then. However, we owe more on it, than it is worth, since home values have decreased in our area over the last several years. We are planning on moving out of state in a few years, and I’m wondering what others think…I wonder if it would make more sense to just stay put, stop paying our mortgage, and see what happens. We may be able to live rent-free for a year or more, and save/invest…Our credit scores are actually pretty good now, and we have established new credit, make all our payments on time, and always pay more than the minimum. What kind of hit will our credit scores take if we have foreclosure? Or will it even show as a foreclosure, since we didn’t reaffirm and our mortgage was discharged in our BK?”
These particular questions raised by this illustrated personal bankruptcy story are rather common throughout bankruptcy forums. Good credit scores are important to all the people who need it to buy homes, automobiles, rent, get utilities, get telephone service and a whole variety of other commodities in order to just exist in our modern society. So, the two questions raised in the illustration are very important ones and very common ones.
Ramifications of Bankruptcy and Foreclosure on Credit Scores
When someone files for bankruptcy protection, your credit scores will take a hit, and the bankruptcy will remain on your credit report for up to 10 years. In the case of the married couple in the illustration, it has been several years since the bankruptcy closed, and they have been diligently rebuilding their credit scores, something that takes time to do.
When you file a Chapter 7, you are not required to reaffirm your secured mortgage loan. The debt of the mortgage is forgiven when you do not reaffirm the loan, but the lien on the secured home survives the bankruptcy. That means anyone having a lien on the home can foreclose on the home if there has been a default or if the mortgage contract has a bankruptcy clause allowing a foreclosure when a bankruptcy is filed.
The couple in the illustration kept up their payments on time, and the mortgage company either had no bankruptcy clause or did not foreclose by choice. When the couple defaults on the loan by stopping payments as they plan to do, the mortgage company will eventually foreclose.
The moment the foreclosure begins, the mortgage company most likely will report the proceeding the credit reporting agencies. Technically, they can report the foreclosure because it is an attempt to satisfy the lien, but they technically should also show that the loan has been satisfied by the bankruptcy, showing a $0 balance on the loan.
Sometimes mistakes are made, and unfortunately, the reports reflect these errors as facts. That is why you should monitor your credit reports. These errors can be corrected. Theoretically, foreclosure notices to credit reporting agencies should not hurt your credit score, but if errors were made, they can.
- Can a Creditor Report a Repossession of a Non Reaffirmed Property After a Bankruptcy Discharge? (betterbankruptcy.com)
- Four Common Questions on Foreclosure and Bankruptcy (betterbankruptcy.com)
- Bankruptcy and the Mortgage Forgiveness Debt Relief Act of 2007 (betterbankruptcy.com)
- Discharge and a Loan Modification After Bankruptcy (betterbankruptcy.com)
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