Know your options for your home if you are filing bankruptcy

The Catch-22 of the current Bankruptcy/Foreclosure Insanity

Three years ago, unbeknownst to me, a dear friend/client went through serious financial difficulties. When all other options failed, like so many others who were caught in the recent market collapse, he made the very difficult decision to file for bankruptcy. He included several houses that he owned in several states.

He and his wife kept up their payments on their loans until the day that their bankruptcy was discharged. On that very day, they moved out of their home, believing that they no longer owned it. Unfortunately, he told no one about what they were going through, and most of us would have advised him differently. Be that as it may, they moved into a rental and started paying rent. That was more than three years ago.

He called me recently and told me what had happened, and said that they had passed the required time, and they are now ready to purchase a new home. When discussing his financial situation with my Lender, we found out that he still owned all of his homes! Colorado is a Public Trustee state. WHEN the banks eventually get around to foreclosing on these properties, even though they have already been discharged in the bankrupty, he will have to go through the entire foreclosure proceeding. 

Since foreclosure has not even begun on any of them, it can reasonably be assumed that it will be at least another year before that process is completed. According to FHA guidelines, you must be at least three years out from a foreclosure to be able to get a loan on a purchase. So the reality of his situation is that, even though he is more than three years PAST the discharge of his bankruptcy, it will be AT LEAST four more years before he can purchase. In other words, at least SEVEN years from the time he filed.

His houses have been vacant this entire time while he pays rent elsewhere. The banks have been paying insurance and utilities while these houses go derelict. I had no idea that people in this situation were still open to foreclosure under the circumstances, but I am finding that it has become a common occurrence. I don't know about you, but I think there is something terribly wrong with this picture.