Is a Bankruptcy Foreclosure Different?
Although the end result may be the same, there are important differences to understand when dealing with a bankruptcy foreclosure. To determine whether or not it is worth the time and effort required to pursue a specific property, it is necessary to understand how a bankruptcy foreclosure is different from other foreclosures.
Timeline for Bankruptcy Foreclosure Purchase
Perhaps the most important difference between a standard foreclosure and a bankruptcy foreclosure is the length of time it takes before the property is fully foreclosed upon and available for sale. Because bankruptcy law requires creditors to stop collection efforts once bankruptcy is filed, the lien holder or lender is unable to continue the necessary paperwork and other legal steps required to take possession of the property. Instead, the person filing for bankruptcy protection will be required to list all available assets and debts to be included in the bankruptcy discharge, and then be granted a final dissolution. At that point, the lender will either be repaid or (in most cases) the debt will be included in the bankruptcy and the foreclosure will be finalized. Either way, it can take six months to a year before the final dissolution of bankruptcy is granted –that’s a long time to wait for a deal to go through, even for the most dedicated investor.
Liens and Bankruptcy Foreclosures
Another consideration to keep in mind when dealing with bankruptcy foreclosures is the existence of other liens that may be associated with the property but not discharged in the bankruptcy process. Federal IRS tax liens are a relatively common example of this. Once the Internal Revenue Service places a lien on the property, it must be satisfied and IRS debt is rarely eligible for bankruptcy protection. If the property is sold or transferred, the new owner may become fully responsible for the lien. Likewise, local government assessments such as property taxes, road paving liens, or other taxes may also transfer to the new owners.
For Those Considering A Bankruptcy Foreclosure
Finally, a bankruptcy foreclosure is likely to have long-term implications for the former owner, including lasting harm to one’s credit score and ineligibility for government assistance mortgage programs for up to ten years. Although many avoidance programs actually instruct homeowners facing foreclosure to file for bankruptcy protection in order to reduce monthly mortgage obligations while the bankruptcy process takes place, it is important to remember that all debts and obligations should be included on the final bankruptcy procedure, otherwise, it’s possible to file bankruptcy and still be left with debt obligations.
The most frequently forgotten debt obligations left off of most bankruptcy filings are the actual federal income taxes associated with any debt forgiveness program offered by the mortgage holder. Remember, if a property sells for less than is owed, the mortgage company has the option of pursuing the balance or writing it off. If it is written off, the amount “gifted” is considered taxable by the Internal Revenue Service. Taxes on the forgiven debt amount are rarely eligible for bankruptcy protection.