Planning to surrender your house in bankruptcy
First off–did you know that it is your right to surrender your secured property in bankruptcy?
Surrendering the property that accounts for the biggest drain on your family’s budget is one of the most compelling reasons why you might consider filing.
But don’t just pack up and leave (just yet).
Make sure you’ve talked to your attorney about the mortgage and the value of your house and your budget. Before doing anything, you must consider the economics of surrender. This is especially important if you’ll be filing a Chapter 13 bankruptcy, and it’s also especially important if not all parties listed on the mortgage are surrendering through bankruptcy.
Once you’ve decided that you’ll surrender your attorney will explain how things will play out in the bankruptcy court.
The most important thing for you to understand are:
Even though you’ve filed bankruptcy and indicated that you’ll surrender the property, it is still ‘yours’ until the bank forecloses on it. Surrender does not equal foreclosure.
This means that you are responsible for maintaining insurance on the property that will protect you if, for example the house burns down, is struck by lightning, or is otherwise damaged. Insurance will also protect you if someone is injured on the property. Dropping the policy means that you, not the mortgage holder, will be liable.
You are also listed on the tax roles as the owner of the property and that means that technically you are responsible for paying the taxes on the property. Your attorney will analyze whether the taxes are attaching the property (likely) or if a tax lien attaches to you personally. Typically the taxes attach to the property and they will be reconciled when the property changes hands.
We cannot compel your mortgage company to foreclose. It can take months, or years, or longer for foreclosure to happen. [I recently received a letter from a mortgage holder that said something to the effect of “we will not foreclose on the property.” That opens up a whole other can of worms!]
Bad real estate markets mean that banks are not necessarily eager to foreclose. Yes, it’s you on the hook for insurance until foreclosure.
Take the risk seriously, and call your attorney for advice.