Considerations When Surrendering A House During Bankruptcy

Many debtors are surprised to learn that surrendering a house during a bankruptcy does not immediately transfer ownership back to the bank. The way that the bank gets title is either by a deed transfer from the debtor (like a deed in lieu of foreclosure), or, most commonly, through a foreclosure sale.

Unfortunately, banks are currently swamped with empty homes and pending foreclosure sales. It could be months (or years!) before the bank gets around to foreclosing on your property. In the meantime, you still own the house. That’s right: even though you have surrendered your house in bankruptcy, no longer pay the mortgage, and no longer live in the house, you still own it until the deed is transferred.

“But I discharged my obligations on the property, right?”

Well, sorta.

Even though the bankruptcy discharge prohibits the bank from trying to collect on the home debt from you personally, you still have obligations as owner of the real estate. A recent bankruptcy case out of the First Circuit states that the lender is not obligated to foreclose or release its lien on a surrendered home as long as they’re otherwise in compliance with state law. The court in Canning vs. Beneficial Maine Inc., held that the bank’s refusal to foreclose was not a violation of the bankruptcy discharge order, and does not interfere with the debtor’s right to a fresh start.

On the one hand, ownership means that you can live rent-free in your house until a foreclosure takes place.  It also means that you no longer have to worry about real estate taxes, which are attached to the property. On the other hand, you are responsible for certain “cost of ownership” bills until the deed is transferred. Among these costs are post-discharge home owner association dues, which are assessed against the individual, not the property. You are also required to maintain the property to comply with local laws (cutting grass, etc.), and to safeguard the property against loss, which means keeping insurance and keeping minimum utilities on at the house to prevent pipes from freezing, etc.

Surrendering real estate in bankruptcy is not always as easy as it sounds. If you are considering surrendering your property, speak with an experienced bankruptcy attorney and discuss your individual situation. Determining a course of action before filing bankruptcy will help minimize financial liability and maximize your financial benefit.