Your Home in Bankruptcy
by Michael Sosna
Keeping Your Home
If you are current in your mortgage payments, you will keep your home whether you file a Chapter 7 or a Chapter 13 bankruptcy, as long as you continue to make your regular monthly payment on time. Filing a bankruptcy will not prevent you from seeking a mortgage modification from your lender to lower the amount of your monthly payment.
If you are behind in your mortgage payments and want to keep your house, you can file a Chapter 13 bankruptcy. In a 13, you make a payment each month to the Chapter 13 Trustee which includes your regular mortgage payment and enough to pay off the arrears during the time of your Chapter 13 Plan, normally 5 years, and the Trustee pays your lender. The filing of the bankruptcy stops any efforts by your mortgage company to foreclose as long as the case is filed before the foreclosure becomes final. As long as you continue to make your Chapter 13 Plan payments on time, the mortgage company can take no steps against you.
A Chapter 7 bankruptcy will not help you if you are behind in your mortgage payments and want to keep your home because there is no payment provision to allow you to catch up your arrears.
While you are in a Chapter 13, you can also apply for a mortgage modification to lower the amount of your monthly payment and a “forbearance” of the arrears. A forbearance means the mortgage company will tack your arrears on to the end of the loan, making you current in your payments at the time the forbearance is granted. When that happens, you start making your mortgage payments directly to your lender and your Chapter 13 Plan amount will be lowered. In some instances, for example if your mortgage was the only “secured” debt in your case, you may be able to convert to a Chapter 7, make no more payments to a Trustee and discharge your “unsecured debts."
Walking Away From Your Home
Sometimes people decide that they can no longer afford the mortgage payments on their home. There are lots of reasons this can happen. Loss of a job or even a reduction in hours and pay; perhaps a medical problem that forces a person out of work for an extended period and results in unexpected expenses; or perhaps some other unanticipated but necessary expense. Whatever the reason, occasionally families decide that realistically they no longer have the money in their budget to pay for their home.
Giving up one’s home is always a difficult decision. But you never want to throw good money after bad; continuing to try to make payments when foreclosure is inevitable means you are throwing money down the drain.
Bankruptcy – both a Chapter 7 and a Chapter 13 - can provide some relief in these situations because you can surrender (walk away from) the home and “discharge” the debt, meaning that the mortgage company cannot come after you for the remaining balance on the mortgage, even if the sale of your house at foreclosure doesn’t bring enough to pay off the balance of the debt. As a result of not having to continue to make the mortgage payment, you will be better able to pay your future expenses, including rent or a mortgage for your new home.
What happens when the mortgage company doesn’t foreclose?
“Surrendering” your home in bankruptcy means stating in the bankruptcy schedules (paperwork) you file that you intend to walk away from your home and discharge the mortgage debt. But just saying you surrender it to the mortgage company does not terminate your ownership of the home. Transfer of title to real property can only be accomplished by the recording of a deed or by foreclosure.
As a result, even though you state your intention to surrender your home, until the mortgage company forecloses or accepts a deed transferring the property from you to them, you continue to be responsible for other costs involving the property, such as property taxes or homeowner association dues, and in some towns the upkeep of the property – for example keeping the lawn mowed.
There are two ways to avoid this problem. The easiest is simply to prepare and record a deed, transferring title to the property to the mortgage company. If the mortgage company does not formally reject this transfer of title, the law presumes they accepted the transfer and your legal ownership – as well as the costs and responsibilities – is terminated. As a practical matter, the mortgage company rarely rejects the deed.
The problem is that the Register of Deeds, the office in which the deed transferring the property is recorded, will not accept a deed for recordation if there are outstanding real property taxes due for the home. If the amount is not large, very often it makes sense to pay the tax in order to simply end your legal ownership.
But sometimes the taxes owed are a large amount. If you have not been paying your mortgage and the taxes are included in the amount of your monthly payment, the mortgage company may not have paid the taxes. Then the amount necessary to pay the taxes and record the deed may be more than you can afford.
This is a problem that sometimes occurs and bankruptcy attorneys have been searching for the solution.
In some bankruptcy courts, the Judges have allowed a creative solution. Pursuant to the Court’s order, the owner sends a deed – in this instance called a Quitclaim Deed – to the mortgage company, thus avoiding the cost of paying the outstanding property taxes, and the Judge gives the mortgage company a period of time (normally 60 days) to either:
1. Record the deed and accept ownership of the property;
2. Reject the deed by filing a written statement with the court; or
3. Start foreclosure proceedings.
Sometimes this is enough to push the mortgage company into action and it will either record the deed or start foreclosure. If the mortgage company fails to respond, the Court will then authorize the owner to file the Quitclaim Deed to transfer ownership. Although this does not avoid the problem of paying the property taxes, it does remove any uncertainty about whether the mortgage company has accepted the deed. This is because the transfer is not based on an presumption but upon a Court Order.
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