Surrendering a House in Bankruptcy

Often one of the reasons that people choose to file bankruptcy is that they are facing foreclosure and want to save their home. Bankruptcy can be filed to stop foreclosure and allow homeowners to keep their property. However, for some people, it makes more financial sense to surrender the property to the lender during the bankruptcy process. Those considering filing bankruptcy should understand the process for surrendering a home in bankruptcy and why the mortgage lender still needs to go through the foreclosure process after the debtor gives up the home.

The Process for Surrendering a Home in Bankruptcy

The first step to surrendering a home in the bankruptcy process is for the debtor to decide that surrendering the property is the best option for his or her financial situation. If the debtor determines that at the outset, he or she notifies the mortgage holder of his or her intent to surrender the property when filing the bankruptcy petition.

Those filing Chapter 7 bankruptcy do so by filing a Statement of Intention form. Those filing Chapter 13 bankruptcy do so by stating in the Chapter 13 plan that the debtor will surrender the home. If the debtor decides later on in the bankruptcy process to surrender his or her home, he or she may amend the bankruptcy petition at that point.

After the borrower gives the mortgage lender notice that he or she intends to surrender the property, the lender must petition the bankruptcy court for relief from the automatic stay that bankruptcy puts on creditor collections so the lender can repossess the house and begin foreclosure proceedings. The bankruptcy discharges (eliminates) the deficiency on the home, which is the difference between the amount owed on the mortgage and what the house sold for at the Sheriff’s sale.

Fortunately for the debtor filing bankruptcy, he or she may stay in the home for many months, sometimes over a year, without having to pay the mortgage. The debtor does not have to move out of the home until the Sheriff’s sale, which usually occurs several months to over a year after the homeowner began missing mortgage payments. In addition, the bankruptcy filing slows down the normal foreclosure process and may provide the debtor additional time to live in the home. This allows the debtor to save up money, as he or she can literally live in the home for an extended period of time without making a mortgage payment. Furthermore, the debtor/homeowner would not be liable for the property taxes, which are discharged (wiped out) in the bankruptcy.

Why the Mortgage Lender Still Forecloses on the Home

The lender needs to foreclose on the home even though the debtor has voluntarily surrendered it in order to get legal ownership of the property and extinguish any other liens that the debtor may have on the property. And, only after the lender has legal ownership of the property can the lender sell it to another buyer.

Making the decision to surrender a home can be difficult. Many people want to save their home from foreclosure, which can be done through a Chapter 13 bankruptcy, but sometimes it makes more financial sense to let the property go.

The decision whether to keep your home or let it go is very important and based on many variables. If you are facing foreclosure, talk to an experienced bankruptcy attorney who can discuss your situation with you and advise you of your options, which include either saving the home, or letting it go and eliminating the debt owed on the mortgage and property taxes.