May I “Walk Away” From My Home?
May I “Walk Away” From My Home In a Bankruptcy?
Under most circumstances, a debtor can keep her home or other real property after filing a bankruptcy case provided she is current on the mortgage and continues making monthly payments. Sometimes, however, a debtor either cannot afford to maintain the property, or for various other reasons, does not want to keep it. In that case, she may elect to “surrender” the property back to the mortgagee or other secured creditor. Doing so will generally result in the discharge of most or all of the obligations arising under the deed of trust or mortgage (i.e. payments, insurance, property taxes, etc.). This means that the debtor will no longer be legally required to make mortgage payments and the lender’s only recourse is to foreclose on its deed of trust or negotiate with the debtor to obtain a consensual transfer by short sale or deed in lieu. However, there are certain post-petition liabilities that a debtor should consider prior to simply walking away.
Even when surrendered after the filing of a bankruptcy case, the property remains legally titled to the debtor until formally transferred to a third party under State law. Each lender is different and can take anywhere from several months to several years to actually conclude a foreclosure (or agree to a short sale or deed in lieu). Until that happens, post-petition liabilities may arise that may not be subject to the discharge.
If a property owner fails to maintain insurance on the property, a secured lender will generally buy “forced” insurance. However, this insurance will only cover the value of the lender’s loan and does not protect the owner’s property or personal liability. If someone injures themselves on the property, the owner may be liable for damages, even if the owner effectively abandoned the property (remember, the property ownership remains in the debtor’s name until transferred to a third party). That’s why it’s generally a good idea for a debtor to maintain insurance coverage on a surrendered property until it is legally transferred out of her name.
Local Ordinance Violations
Some local governments have ordinances that require minimum maintenance of a property (e.g. landscaping, graffiti removal, etc.). Depending on the language of the ordinance, violations may incur either in rem penalties (against the property), in personam penalties (against the person), or both. If a penalty is in personam, a debtor may be personally liable even if she has abandoned the property. Before walking away, it’s usually a good idea to determine what kind of local ordinances governs a property, if any, and to maintain the property accordingly.
The Bankruptcy Code specifically states that in a Chapter 7 bankruptcy case, HOA fees incurred after a bankruptcy is filed are not discharged (fees incurred prior to a bankruptcy filing can generally be discharged). These can remain a personal liability of the debtor and can add up very quickly.
Although a debtor may surrender real property in a bankruptcy, there are several pitfalls that await the unprepared. Debtors should talk to their bankruptcy attorneys about the potential liabilities that could survive a bankruptcy before just walking away from a home.
About Hurlbett & Olmstead
Since 1994, we’ve helped thousands of people in Santa Barbara, Ventura, Paso Robles, Santa Maria and San Luis Obispo regain financial peace in their lives. These people now experience a life free from the stress and worry that comes from watching unpaid bills mount, answering calls from arrogant debt collectors, receiving a lawsuit from a process server, finding an empty spot where a car has been repossessed, missing money from a garnished paycheck, or knowing that their house will soon be sold at foreclosure.
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