Here’s a question I frequently get that displays an understandable confusion about what a bankruptcy does and does not do; “If I choose to surrender my home in a Chapter 7, when do I have to move out?”
Chapter 7 of the Bankruptcy Code provides three options for the treatment of secured creditors, including mortgage companies. If the debtor chooses to keep property that is collateral for a debt, the secured creditor must be paid. That can be done by a formal “Reaffirmation”, where the debtor signs an agreement, filed with the court, which excludes the debt from the discharge. In other words, the debtor still has personal liability to pay the obligation despite the bankruptcy. There is also an informal process called “Retain and Pay”. This is not sanctioned by the Code, but is frequently allowed by mortgage companies. In that instance, the debtor continues to pay the mortgage without an agreement. The debt is discharged, but the debtor stays in the home as long as payments are made. This has the advantage of relieving the debtor from a personal obligation to pay. However, the mortgage company will not report future payments on the debtor’s credit report, thus possibly delaying credit rehabilitation.
The second option for keeping collateral after bankruptcy is “Redemption”. Here the debtor pays the creditor the value of the asset in cash and the creditor releases the lien. This option is often used to pay car loans less than the balance by only paying the value of the vehicle. Because of the cost, this option is generally not available to pay home loans.
If the debtor chooses to not keep the collateral, including a home, the Code provides that he may “Surrender” the collateral to the creditor. Here is where the confusion begins. “Surrender” is a term of art. There is no physical surrender, and the bankruptcy does not transfer ownership of the property to the bank. Something must be done during or after the bankruptcy to convey the property to the bank. Bankruptcy discharges the debt, but it does not dispose of the property.
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Even if the choice is to surrender the home as part of a Chapter 7, the automatic stay provision of the Bankruptcy Code still protects the debtor, at least temporarily. At some point, the mortgage company may file a motion in bankruptcy court called a Motion for Relief from Stay in which they ask the Judge to lift the automatic stay so that they can pursue their state law remedies, including foreclosure. Once stay relief is granted, the mortgage company can start the foreclosure process. My advice to clients is to sit tight and stay in the house. Once stay relief is granted, the clock will start ticking. Here in Washington the foreclosure process takes a minimum of six months and, in practice, much longer.
Finally, if the mortgage company does nothing, the stay will remain in effect until the case is discharged and closed. At that point, the stay would terminate and the mortgage company could start the foreclosure process post-discharge. But here’s the key point, until the bank forecloses or the property is sold, the debtor still owns it. Neither the bankruptcy filing, relief from stay nor the discharge removes the debtor from the deed. So the answer to the question proposed at the beginning of this email is, “You don’t have to move until the bank forecloses or you sell the house.”
In addition to the question of moving from the home, the confusion that arises from the use of the term “surrender” has two implications. First is HOA dues. The bankruptcy discharge applies only to those dues that were due at the time of the filing. Any HOA dues that become payable after the filing must be paid until the debtor no longer owns the property.
The second problem is illustrated by a call I received last week from a homeowner who had received a bankruptcy discharge in 2011. He was denied a home loan because he still owned the property he had “surrendered” in the bankruptcy. He was under the misapprehension that the bankruptcy had somehow transferred the ownership to the bank. I assured him that was not the case. For reasons known only to the mortgage company, no foreclosure had ever been initiated despite the more than three years of no payment. He now had to find a way to dispose of the property.
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I guess that this was all a long way of saying that even bankrupt homeowners may be in need of your services. Once the bankruptcy is closed, there is an opportunity for you to list and sell the property. A short sale may be an attractive alternative to foreclosure. It gives control of the timing to the homeowner. It may result in less credit impairment, and if there are HOA dues, it will more quickly relieve the homeowner from responsibility for paying them.
(Credit to the author of this article: Ed McFerran, Attorney at Law)
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