Kentucky Bankruptcy Law

Counsel with Care

Issues with surrendering real estate

Reality has set in. The home loan modification you so desperately hoped for fell through after they strung you along for months (“Just keep making the payments during the trial period” or “Your application is being processed, just keep paying”). Your budget is so tight that even in a Chapter 13 your would not be able to pay off the arrearage on the loan for the house and you can take Chapter 7 according to the means test. It is now unavoidable that you will not be able to keep the house and so you tell your attorney to check the “Surrender” button for your intentions on your principal residence. It feels like surrender too, but not entirely in a bad way. Surrender also means the fight is over and the fresh start of debt free living can begin. But, what do you do with the house now?

Some people feel compelled to get out of the house as quickly as possible. It is a desire to get going on that fresh start by getting the old out of the picture and finding a new place; renting an apartment where they will not be reminded of the lost home. Sometimes it is because of a fear that someone will show up unexpectedly and toss you and all your stuff out on the lawn (which won’t happen unless you have some in-laws that are also outlaws and mad at you). Lastly, sometimes it is just a sense of guilt for staying someplace and not paying for it. I understand those driving emotions, but I caution you to sit tight for as long as possible.

Before I explain why you should sit tight, I need to revisit a core principle of Chapter 7. This type of bankruptcy establishes a single point in time where everything you owe and eveything you own goes into a fictional pot called an estate. Then, you use exemptions and reaffirmations to pull assets back out of that pot that you want to keep while leaving most debts behind. Once that point in time is created, everything you earn and every debt you create after that moment remains yours; new assets and new debts do not go into the estate. So, what does that have to do with a house I have surrendered? Aren’t my debts on that house going to be discharged?

Well, yes, those loans you had that were secured against the house will likely be discharged (barring any kind of pre-filing fraud or other bad acts that can prevent a discharge). However, you have a nice, tempting, empty piece of property just sitting there inviting neighborhood kids, hoodlums and other roustabouts to come in and have at it. However, your name remains on the deed for the house until after the Master Commissioner sale is confirmed or your provide them a quitclaim deed. Because this is all AFTER you filed your petition, you are liable for potential debts that could arise as the titled owner of the house.

If someone were to be injured on your property after the filing of the Chapter 7, you could get hit with damages from the injury. Additionally, the mortgage holder of the property could make a case for damages done to the property itself that decreases its value or for the insurance policy they obtain (I’m not saying they would be successful, but who wants the aggravation and expense of finding out if they would be?). You could propably afford to pay the insurance premium on the property if you are not paying the house payment, but home owner’s policies usually become void or voidable if no one resides in the house for over a certain period of time. So, there are several reasons to remain in the house until either the Master Commissioner’s sale is confirmed or a quitclaim deed is filed transferring ownership of the house.

Here is a recap of those reasons:
1) You are potentially liable for injuries that occur on property you still have title to after the Chapter 7 is filed.
2) You will have a hard time getting insurance coverage on an empty house (though there are specialty companies that do this for a high premium).
3) An empty home is an open invitation to high risk behavior that can lead to injury.
4) You are in financial dire straits and living there while not paying the house payment can help you get ahead and find a nice place to move to once the ownership is transferred. Yes, it may feel uncomfortable, but not as uncomfortable as having a post filing debt and not being able to get another discharge for a number of years.

So, plan on staying in your surrendered home for several months even after filing Chapter 7. If you must move, negotiate transferring title to the mortgagee while the bankruptcy is pending.

October 26, 2010 - Posted by | Bankruptcy, Chapter 7, Property (exempt, reaffirm or surrender) | , , , , ,

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