Dear Bankruptcy Adviser, If someone files bankruptcy, does the bank take his house? I spoke to someone looking to rent his house, but he says he can only rent month-to-month because he has filed bankruptcy. What kind of bankruptcy would make the bank take over your house? -- Robert
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Dear Robert, The bank does not take your home because you filed bankruptcy. However, the filing of the bankruptcy may trigger another reason a house is sold.
You are likely describing a scenario in which the homeowner is delinquent on mortgage payments prior to filing bankruptcy. The homeowner then files bankruptcy to stop the sale on the home, but is either unable to bring the mortgage current through a repayment of the delinquent balance or unable to obtain a loan modification. The bankruptcy merely delays the selling of the house in foreclosure.
Once the lender is notified of the bankruptcy, it will file a motion with the bankruptcy court to remove the house from bankruptcy protection. Once the motion is granted, the bank will continue with the sale of the property.
The bank cannot take the house simply because the homeowner filed bankruptcy. As far as I know, there are no default provisions in loan documents that allow this. I have seen only bankruptcy as a default provision in one type of loan: a local governmental agency homeownership program available for low-income individuals to purchase a house. These programs have loan terms that allow the homeowner to own the house and not make mortgage payments, but obligates the homeowner to maintain the property by paying property taxes and insurance. Even in these types of cases, I have been able to work out an arrangement with the government agency to allow the homeowner to keep the property.