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Will My Mortgage Company Force Me Into Bankruptcy? – Dena

“Dear Steve,

I divorced last January. My house had 3 liens from my x-husband’s company so I chose not to keep the house but to let it go into foreclosure (he filed bankruptcy). The house had 2 loans, one for $140,000 and a junior for $35,000. The house went to auction this last August which covered the first loan. The second loan is showing as being charged-off on my credit report.

Will a collection agency come after me for this second junior loan? Will I be forced into bankruptcy by any chance? I would rather settle than go bankrupt but can’t seem to get an answer from the lady I talked to from Chase. She just said to wait it out the next couple months to see what happens. Do you know what usually happens in this situation?

Dena”

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The Answer

Dear Dena,

It really depends on what state you live in. Not all states allow the lender to pursue a deficiency. The states that are non-recourse are: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.

Your comment about being forced into bankruptcy is interesting. A creditor can’t “force” you into bankruptcy.

If you don’t live in one of those states I would expect a collector to chase down the debt and attempt to recover.

The bigger issue if you can be chased for the debt is the potential tax liability from the forgiven debt if Congress allows the tax waiver to expire at the end of 2012. If you are liable for the debt and it is hanging over your head, debt discharged in bankruptcy is not taxable.

If you have the cash on hand to payoff the second mortgage or can enter into a mutually agreeable settlement with the lender, that might take care of the issue. But keep in mind, a settlement can still result in a tax liability if you are solvent.

I think you would be better off just talking to a local bankruptcy attorney and understanding if you can be chased for this residual mortgage debt and if so, what your options are to avoid a potential tax liability and recover quickly. Rebuilding your credit is easy following a bankruptcy. See this article.

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

Will My Mortgage Company Force Me Into Bankruptcy?   Dena
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Dena

    Thank-you for the info! This has been very helpful in pointing me in the right direction.

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