Many have come to me seeking to keep a home that they probably should have never bought in the first place. Yet others turn to bankruptcy because a payment that they could make before has become too cumbersome to continue making now. Many of these come with the expectation that bankruptcy will somehow save their homes without them having to continue making the payment that they can no longer make.
Unfortunately, there is no power under the bankruptcy law to force a bank to modify a home loan to make it possible for someone to keep their home without them having to keep making the payment. Even though a Chapter 13 bankruptcy would allow you to make up the arrearages over a 3 to 5 year period, you still have to continue making the monthly payment. For some, that is just not a possibility
The sad truth is that many of those in this situation will need to surrender their home to the bank. The good news is that the deficiency debt then becomes unsecured and is therefore dischargeable in bankruptcy.
Now here is where pitfall #1 comes in. Under the bankruptcy code, the debtor is required to exercise their intentions for their secured property within a certain amount of time after the first meeting of the creditors. You would think that by virtue of your surrendering the home, the bank taking the home would automatically take the liability for that property. NOT SO. You are still liable for the upkeep and maintenance of the property until the foreclosure is done and filed in the land records. This means that property taxes, and any yard work that the city has to do to maintain the property is on you.
Because of this, some bankruptcy attorneys tell their clients just to stay in the house until the foreclosure is done and recorded. This has worked out well for some people allowing them to stay in the house rent-free for months if not years as the bank decides what to do with the property.
On the other hand, some banks/mortgage companies are a little quicker on the draw which brings me to pitfall #2. I had a recent case where the client came to me because of a foreclosure. He decided that he wanted surrender the house and asked me how much time he would have to make other arrangements. I told him it depended on how aggressive the foreclosing company was and how far into the foreclosure process they were. Based on the fact that his was so far into the process, I told him that it could be anywhere from a week to a month before he had to get out. Sure enough he received a notice that the sheriff would be kicking him out on schedule in a week. I was able to buy him another week but, the process was so far along that the automatic stay of the bankruptcy could not buy him any time –although it should have but that is the subject for another post–.
One trick to remember is that, if you are going to surrender your home in a bankruptcy and want some time to make other arrangements, filing your bankruptcy earlier in the process may buy you some time, but if you wait too long it cannot do anything for you.
So the moral of my post is that, when it comes to surrendering your house in a bankruptcy, you need to take into account that the property could sit there untouched for a while and cost you money so you might as well live in it as long as you can until they kick you out. But don’t get too comfortable because the bank could, on the other hand, finish up the process quickly. You want to be ready for either situation.