By Christopher C. Carr, Esq. Chester County bankruptcy attorney.
Tel: 610-380-7969 Email: cccarresq@aol.com Web: westchesterbankruptcyattorney.org
Using bankruptcy to rid oneself of a home that has become unaffordable and/or is now worth far less than it once was is called “surrender” in bankruptcy parlance and is governed by the US Bankruptcy Code. This procedure is nearly as commonly used as is bankruptcy to stop a foreclosure so that a home can be retained. We practitioners are using it much more frequently since the housing market is in decline. Why is that?
Well, the question whether to keep a home when filing bankruptcy is usually answered by comparing the amount of the home’s monthly mortgage payments with the income the debtor is able to devote to housing payments. Also key in today’s real estate market place is a comparison of the home’s appraised value[1] as compared with the amount still owed by the home owner. Where the home is worth significantly less than the amount owed, the home is said to be “under water”. If the payments are no longer affordable and/or the property is under water, the debtor will likely choose to surrender the home as part of either a Chapter 7 or Chapter 13 bankruptcy filing.
However, in practice property “surrender” is often more problematic for the homeowner[2] than it would at first blush seem. Foreclosure means the involuntary transfer of a property in a public sale or what is commonly called in Pennsylvania and many other states a “Sheriff’s Sale” because the County Sherriff will typically sell properties by the hundreds at public auctions held in the Pennsylvania counties following advance notice of the sales published by these officials. The requirements for these notices are very precisely defined in the relevant state statutes. These sales are usually conducted monthly and the sale ENDS the legal ownership and responsibility of the debtor. Sounds pretty straightforward does is not? However, in reality, mortgage companies are often slow to foreclose on homes that are surrendered to the lender in bankruptcy, leaving the home vacant, and yet still technically under the ownership of the bankruptcy debtor, for months or even years after the bankruptcy was filed. It is often said that “Banks are not in the business of owning homes” but like most generalizations this statement is not always true. The mortgage company may prefer to retain the home in its “inventory” rather than to sell it and take a huge loss that it must report to its shareholders in its public filings, perhaps hoping for a “better day” when the housing market starts to show improvement and it can then sell at at least a breakeven. Not only that but during the hiatus it does not need to legally bear these costs and liabilities. Rather the mortgage company or its serviather the mortgage company or its servicer can keep the unsuspecting homeowner paying long after he/she has moved on simply by “sitting on” the property virtually indefinitely.
Many homeowners (and even some bankruptcy lawyers, unfortunately) will intuitively believe that their real estate is now legally the property of the bank because it has been “repossessed” (and they have been disposed) even though no actual sale has yet occurred. They may drop or reduce important coverage’s or fail to insure the property at all and find themselves liable in a slip and fall case for example for the full amount of the damages with no insurance coverage at all.
The purpose of any bankruptcy is to provide to the debtor a fresh start but the slow-to-foreclose mortgage company will routinely create fresh liability for the homeowner/ debtor, who will be held liable for post-bankruptcy homeowners association fees, property assessments, other ownership related financial obligations (but not the monthly mortgage payments, the personal obligation for which the debtor was discharged in the bankruptcy), if and as applicable. The debtor may even be cited and fined repeatedly by the municipality and/or other governmental agencies if the grass is not cut, there becomes an accumulation of junk or hazardous materials on the property (albeit without any participation by the debor), and so forth.
However, a ruling handed down by a Hawaii bankruptcy court this month approved one strikingly clever resolution to the problem. This Chapter 13 decision, In re Rosa, No. 13-00630 (Bky. Hawaii July 8, 2013), approved over the objections of the trustee a Chapter 13 plan which contained a provision designed to force play the situation by in effect arranging to convey the home back to the first mortgage holder. That is, In the Rosa case, the debtor’s Chapter 13 plan ingeniously stated that title to the real estate “shall vest in City National Bank/OCWEN Loan Service upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Bureau of Conveyances.” The Chapter 13 trustee objected, arguing that“surrender” under the bankruptcy law did not transfer ownership of the surrendered property until the lender actually foreclosed.
The court disagreed with the trustee and pointed out that here, the debtor had gone beyond merely “surrendering” the property in the Chapter 13 plan. Rather, the Plan unequivocally stated that confirmation of the Plan by the court would automatically transfer ownership to the lender, and that the order confirming the plan could be recorded like any other deed or conveyance. While the Plan was drafted by the debtor (or more likely his/her attorney), the lender had been properly served with this plan and it had the opportunity to and had not objected to the Plan in court. The Plan was therefore confirmed giving effect to this provision.
The result of this strategy for this particular debtor was the complete avoidance of the ills caused by the foot dragging Mortgage Company and its servicer, noted above. One would think that a majority of the bankruptcy courts and jurisdictions, when presented with this issue, will adopt the new Hawaii precedent as it tends to remedy such evils without placing any undue burden upon or depriving the lender of any of its due process rights, in the eyes of this commenter at least. Perhaps we will even see the Eastern District of Pennsylvania or one of its 3 subdivisions adopting the new rule.
I also provide Mortgage Modification Services.
[1] There are several on line services such as Zillow.com for example that purport to provide property values.
[2] Note that this term used in this context is not inaccurate or imprecise…these persons are still in the eyes of the law owners of the properties they once occupied.
Christopher Carr, Esq. on Debt Relief 