Does chapter 13 wipe out mortgage dept?

2 Replies

If a homeowner is in foreclosure and they file for bankruptcy will their mortgage debt get wiped out?

What happens if I go but the house from them. Will they still owe the bank money and all back interest and fees.

Any insights would be appreciated.

A chapter 13 bankruptcy is a reorganization and debts owned can be negotiated. So it is possible both yes and no.

It is important to uderstand that while the debt may be released in a bankruptcy, the lien against the property is still valid. The lender can still foreclose.

If they are in foreclosure, the BK will keep the house from being sold, but will not eliminate the debt.

Generally speaking a 13 is a "reorganization" its a payback plan, so if the house is worth $100k and the debt is $200k they could theoretically have $100k of secured debt and $100k of unsecured.  The secured debt is paid at 100%, the unsecured could be paid back at significantly less than 100%.

Chapter 7 is straight bankruptcy.  They are going to have the option to reaffirm the debt.  If they do, its like they never filed, they keep making payments and can be sued, foreclosed on, etc.  If they don't reaffirm they give the property up.  I've seen people not reaffirm and keep the payments up and the bank let it go, if thats the case, then the lender still can foreclose on the property, but not pursue the debt other than taking its collateral.

If you buy it and they file later, the judge can actually go back 90 days and unwind the sale.  Rare, but lets say they have a $100k free and clear house, they sell it to you for $5k, then file BK a month later, you better believe the judge (trustee) will go back and take that house to sell it to pay creditors.  

They cant sell it to you without court permission if they are actually in a BK.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.