What if you surrender your home in bankruptcy but the lender does not foreclose?
These days, a lender may not move quickly to foreclose on your property after you have surrendered it, even if there is no longer an automatic stay in effect. The lender may be overwhelmed by volume, or the property has too little value, or the lender may want to avoid responsibility for maintenance, management, marketing, sales, taxes, insurance or condo fees.
Unless the lender forecloses, you still have an ownership interest, and may have some continuing liability, even though you have filed bankruptcy. Below is a discussion of some of those possible obligations, followed by a suggestion that may allow you to avoid them.
Property taxes: A property owner may be held personally liable for real estate taxes. Local taxing authorities don’t generally sue homeowners, but it is a possibility, especially as governments become more pressed to improve revenues.
HOA dues: Dues owed to homeowner associations (HOAs) are a different story. HOAs, especially hard-pressed condo associations, have been particularly aggressive in pursuing fees.
The Bankruptcy Code allows condo owners to discharge liability for pre-petition condo fees. However, that does not mean that an owner can continue living in the condo or rent it out and get a “free ride” at the expense of the other condo owners. To prevent condo owners from taking unfair advantage, Congress adopted Section 523(a)(16) of the Code, which prevents a debtor from discharging post-petition HOA fees as long as he or she has a legal, equitable or possessory interest in the property. Even if you surrender the property and move out, unless the lender forecloses you still have title and may still be responsible for post-petition condo fees (as well as continuing utility costs, assessments and real estate taxes).
Building Code violations: A vacant, abandoned home may give rise to dangerous or unsafe conditions in violation of building codes. It may be something as simple as an overgrown lawn or as serious as an attractive nuisance to children, occupation by drug users, or constituting a fire hazard. A Building Code violation may be punishable by a fine or even jail time.
What can you do?
Jingle mail? Just mailing the keys to the lender won’t relieve you of liability, since that doesn’t convey title.
Deed in lieu of foreclosure: Lenders generally do not like to accept a deed in lieu of foreclosure, since they would be getting the property subject to junior claims that could otherwise be wiped out by foreclosure. CAUTION: be wary of any overtures from the lender offering to consider a deed in lieu of foreclosure provided you fill out an application disclosing all your assets. This is a ploy to find possible sources of recovery if the lender decides to sue or to put pressure on you to pull money out of your 401(k). Don’t do it! Retirement funds are protected from creditors.
Deed the property and put the burden on the lender to deny ownership.
Here are some legal principles that will make it difficult and costly for a lender to deny ownership:
- Recording a deed creates a presumption that an interest in real property has been conveyed. (If you send an unrecorded deed to the lender, the lender could just destroy it.)
- Delivery creates a presumption of acceptance. (Proof of delivery puts the burden on the recipient to prove rejection.)
- A presumption of acceptance is also created if the conveyance confers a benefit on the recipient.
- Preserving the lender’s right to foreclose limits the ability of the lender to deny that the conveyance confers a benefit.
Remember, the lenders don’t usually want a deed in lieu of foreclosure, because then the lender’s title could be subject to other claims (such as a second mortgage), whereas a foreclosure would wipe out junior liens. To undercut a claim by the lender that your deed creates a burden and not a benefit, your deed could disavow an intention to merge the title with the lender’s security interest, and affirmatively state that the lender’s right to foreclose is preserved.
While there is no guaranty, a properly drafted, recorded and delivered deed will stack the cards in your favor by forcing the lender to go to court and publicly disavow an ownership interest. (If the lender disavows an ownership interest, the court could construe that as the lender’s consent to a sale and order the property to be sold by the trustee. See. In re: Pigg, http://creditorsrights101.files.wordpress.com/2011/07/pigg-opinion-bankruptcy-court.pdf
The steps to accomplish this goal are:
- Prepare a deed of the property to the lender containing the special provisions mentioned above. You should seek the assistance of a knowledgeable real estate attorney, since an improperly drafted deed will defeat your purpose. Also keep in mind that if you have filed bankruptcy, you must get the trustee’s permission or wait until the trustee has relinquished his or her interest in the property.
- Execute the deed. Again, proper form and correct execution is essential. Seek an attorney’s guidance.
- Record the deed in the manner and place mandated by state law.
- Have the recorded deed returned to you or your attorney.
- Send the recorded deed to the best address you can locate for your lender and get proof of delivery. I recommend sending it by UPS or FedEx. I am wary of U.S. Postal Service registered mail, return receipt requested, because that green return receipt card has a way of disappearing before it ever gets back to the sender.