Why You May Not Need to File For Bankruptcy

Perhaps surprisingly, one of the most discouraging advancements in our ongoing foreclosure crisis relates to home mortgage loan providers' obstinate resistance to carry through with a foreclosure in a timely way. The majority of commonly, this situation develops in a Chapter 7 Bankruptcy in which the debtor has actually determined that it is in his/her benefit to surrender a house.

As we all understand, mention anti-deficiency laws figure out whether a mortgage lender may look for a shortage judgment after a foreclosure. We also know that a Personal bankruptcy Discharge will secure that house owner from such liability no matter what the debtor's state statutes need to say worrying whether a home mortgage loan provider may seek a deficiency judgment.

While security from post-foreclosure liability to the home mortgage loan provider remains a powerful benefit provided by the Insolvency Discharge, a fairly brand-new source of post-bankruptcy petition liability has actually arisen in the last number of years. One that our clients are all too often shocked by if we neglect to offer increasingly extensive recommendations before, throughout, and after the filing of an insolvency petition.

What I am talking about, obviously, are Homeowners Association fees, and to a lower extent, municipal water and garbage charges. As all of us ought to know well, such recurring costs collect post-petition, and specifically due to the fact that they repeat post-petition, they make up brand-new financial obligation-- and as brand-new financial obligation, the Bankruptcy Discharge has no result whatsoever upon them.

The common case includes a Chapter 7 insolvency debtor who decides that he or she can not possibly pay for to keep a home. Maybe this debtor is a year or more in financial obligations on the first home mortgage. Possibly the debtor is today (as is common here in California) $100,000 or more underwater on the property, and the loan provider has refused to use a loan modification regardless of months of effort by the property owner. The home in all possibility won't deserve the secured amounts owed on it for years to come. The regular monthly payment has changed to an installment that is now sixty or seventy percent of the debtor's family income. This house needs to be given up.

The issue, obviously, is that surrender in bankruptcy does not correspond to a prompt foreclosure by the lender. In days past, state 3 and even simply two years back, it would. However today, home mortgage lenders merely don't want the home on their books. I frequently envision an analyst deep within the bowels of the home loan lender's foreclosure department taking a look at a screen showing all the bank-owned homes in a given zip code. This would be another one, and the bank does not desire another bank-owned property that it can not sell at half the quantity it lent simply 4 years earlier. We could go on and on about the recklessness of the bank's choice in having made that initial loan, however that is another article. Today the home is a hot potato, and there is absolutely nothing the debtor or the debtor's personal bankruptcy lawyer can do to oblige the home loan lender to take title to the residential or commercial property.

Hence the problem. There are other celebrations included here-- most notably, property owners century law firm debt consolidation associations. HOAs have in lots of locations seen their month-to-month fees plummet as increasingly more of their members have defaulted. Their ability to gather on overdue association dues was long thought to be protected by their capability to lien the property and foreclose. Even if their lien was secondary to a first, or even a 2nd mortgage lien, in the days of house appreciation there was nearly constantly adequate equity in property to make the HOA whole. But no more. Today HOAs typically have no hope of recovering past charges from equity in a foreclosed residential or commercial property.

So, where does this all leave the insolvency debtor who must surrender his/her residential or commercial property? In between the proverbial rock and a hard place. The loan provider might not foreclose and take the title for months, if not a year after the personal bankruptcy is submitted. The HOAs fees-- together with water, garbage, and other community services-- continue to accrue on a month-to-month basis. The debtor has typically moved along and can not rent the residential or commercial property. However be guaranteed, the owner's liability for these recurring fees are not discharged by the bankruptcy as they occur post-petition. And she or he will stay on the hook for brand-new, recurring charges till the bank lastly takes over the title to the property. HOAs will typically take legal action against the house owner post-discharge, and they'll strongly seek attorneys' fees, interest, costs, and whatever else they can think about to recover their losses. This can sometimes lead to tens of countless dollars of new debt that the just recently insolvent debtor will have no hope of discharging for another eight years, ought to he or she submit personal bankruptcy once again.

This issue would not occur if home loan lenders would foreclose immediately in the context of an insolvency debtor who surrenders a house. We as insolvency lawyers can actually ask that lender to foreclose currently-- or, better yet, accept a deed-in-lieu of foreclosure, however to no obtain. They just do not desire the home. What recommendations, then, should we provide to debtors in this situation? The options are few. If the debtor can hold on till the property actually forecloses previous to submitting insolvency, this would remove the issue. But such a hold-up is not a luxury most debtors can manage. If this option is not offered, the debtor should either live in the home and continue to pay his/her HOA charges and community services or if the residential or commercial property is a second house, for example, an effort to lease the home to cover these continuous expenses.

In the final analysis, the Insolvency Code never ever contemplated this situation. Nor did most states' statutes governing house owners' associations. A treatment under the Personal bankruptcy Code to compel home loan lenders to take title to surrendered real estate would be ideal, but provided the problems facing this Congress and its political orientation, we can conveniently state that the possibility of such a legislative service is beyond remote.