If you're deep in debt and behind on your mortgage, you may be scrambling for solutions. Chapter 7 is an answer to many debt dilemmas and can even help you sort out a mess with your house. One of the options that many people aren't comfortable considering, though, is surrendering their home. It's a scary idea - letting go of the home you bought, lived in and cared for - but if you truly can't afford the home, it may be inevitable.
Two important thing to know about Chapter 7 is that it can get you out from under a property you can't afford, but can also buy you some time to pull together money for a rental or a down payment on a rent-to-own or property purchase in your spouse's name. In short, it gives you breathing room. Today we'll look at circumstances where you may want to consider a surrender, how it can benefit you and the options it opens up for you.
When to consider a home surrender
If you can't afford the payments, you can't afford the home. That's just math. And if you've fallen behind on payments that were once affordable but now are not either because you lost your job or have an adjustable rate mortgage and the payments have increased greatly, you may want to surrender to get a clean slate. If you owe more on your mortgage than the house is worth and you're struggling to make payments, this is a circumstance where you may want to consider a surrender.
However, if you have significant equity in the home, you don't want to walk away. Filing Chapter 13 to stave off foreclosure and then putting the home up for sale or trying to arrange a short sale may be a better option to try and extract the equity from your home if you can't afford to keep it. A Chapter 7 surrender doesn't have a mechanism to get that equity back to you. In short, equity, property value and ability to pay the mortgage are the deciding factors. Speak with an experience bankruptcy attorney to help you evaluate how best to move forward.
How foreclosure operates in bankruptcy
Even if you choose to surrender a home you can't afford as part of your bankruptcy, there is still a process that has to happen. First, you file your petition including the intent to surrender the home. Next, the mortgage company will file a Motion for Relief from the automatic stay. This means they are asking the court for permission to continue foreclosing even though the automatic stay generally prevents this. Your attorney can push back to try and slow this to buy you more time, but this may not be necessary – time is often part of the process with foreclosure.
If you don't protest, the Motion for Relief will be granted (or it may be granted even if you push back) and your lender is free to file to foreclose. However, this doesn't mean they'll run right out and do so. Some lenders have a backlog of foreclosures to process and some are known not to rush to foreclose as a practice. It will largely depend on the value and condition of your home and the real estate market in your area. Some lenders may not file the Motion for Relief and may just wait out your Chapter 7 discharge and then file for foreclosure. This gives you even more time.
How long does foreclosure take?
The notice of intent to foreclose lets you know the bank is calling in the loan and that your property will go up for auction. 99% of the time, it is the lender that buys the property at auction so they don't take a loss on the mortgage. Once the auction happens, the property is then owned by whoever bid highest, usually the lender or some company associated with the lender. But this doesn't mean you have to leave the home yet.
In fact, it can be months between the auction sale and the notice for you to vacate the premises. The longer you stay put, the more money you can save up. Once the notice to vacate arrives, you'll have about 30 days to get your stuff out or face the knock at the door of the sheriff. 30 days should be enough time to find a rental property and get moved. Worst case, you can store your stuff and stay at a hotel or with a loved one until you can get into a property.
Why you should stay put as long as you can
Just because you've decided to surrender your property doesn't mean you should pack your bags and go. In fact, this can cause you even more trouble. Here's why. If you move out and the property falls into disrepair, you can be fined by the Homeowner's Association or the municipal government if the property is still titled in your name.
A notice of foreclosure doesn't mean you no longer own the property and even after a sale at auction, the deed may remain in your name for months until the purchaser gets around to filing with the county. Read this blog we wrote about how to protect yourself in cases like this, but it's important that you don't let the house get you into trouble before it's formally handed off to your lender.