Possibly surprisingly, among the most frustrating advancements in our ongoing foreclosure crisis pertains to home mortgage lenders' obstinate resistance to carry through with a foreclosure in a timely manner. Most commonly, this circumstance emerges in a Chapter 7 Insolvency in which the debtor has determined that it is in his or her benefit to give up a home.
As we all understand, mention anti-deficiency laws identify whether a home loan lending institution may look for a shortage judgment after a foreclosure. We likewise know that a Bankruptcy Discharge will secure that property owner from such liability despite what the debtor's state statutes need to state concerning whether a home mortgage lender may seek a shortage judgment.
While security from post-foreclosure liability to the mortgage loan provider stays an effective advantage provided by the Insolvency Discharge, a fairly new source of post-bankruptcy petition liability has arisen in the last couple of years. One that our clients are all too frequently amazed by if we overlook to use progressively comprehensive advice before, during, and after the filing of a bankruptcy petition.
What I am talking about, naturally, are Homeowners Association fees, and to a lower extent, municipal water and trash fees. As all of us need to know well, such recurring fees collect post-petition, and exactly since they recur post-petition, they make up brand-new financial obligation-- and as new debt, the Bankruptcy Discharge has no impact whatsoever upon them.
The typical case involves a Chapter 7 insolvency debtor who decides that he or she can not perhaps afford to keep a house. Possibly this debtor is a year or more in arrears on the very first mortgage. Maybe the debtor is today (as prevails here in California) $100,000 or more undersea on the home, and the lender has actually declined to provide a loan modification despite months of effort by the house owner. The home in all probability will not deserve the protected quantities owed on it for years to come. The regular monthly payment has actually gotten used to an installation that is now sixty or seventy percent of the debtor's home earnings. This house must be given up.
The issue, naturally, is that surrender in bankruptcy does not correspond to a prompt foreclosure by the lending institution. In days past, say 3 or perhaps just two years earlier, it would. But today, home mortgage lenders simply do not want the home on their books. I frequently envision an expert deep within the bowels of the home loan lender's foreclosure department taking a look at a screen showing all the bank-owned homes in an offered postal code. This would be another one, and the bank does not want another bank-owned residential or commercial property that it can not sell at half the amount it lent simply 4 years ago. We could go on Century Law BBB and on about the recklessness of the bank's choice in having actually made that initial loan, however that is another article. Today the residential or commercial property is a hot potato, and there is absolutely nothing the debtor or the debtor's bankruptcy lawyer can do to force the home loan loan provider to take title to the residential or commercial property.
Hence the problem. There are other celebrations involved here-- most notably, house owners associations. HOAs have in lots of locations seen their month-to-month fees plummet as increasingly more of their members have actually defaulted. Their capability to collect on overdue association dues was long thought to be protected by their capability to lien the home and foreclose. Even if their lien was subordinate to an initially, or perhaps a second mortgage lien, in the days of home gratitude there was nearly constantly sufficient equity in real estate to make the HOA whole. But no more. Today HOAs often have no hope of recuperating unpaid from the equity in a foreclosed property.
So, where does this all leave the bankruptcy debtor who must surrender his or her residential or commercial property? In between the proverbial rock and a difficult place. The loan provider may not foreclose and take the title for months, if not a year after the bankruptcy is filed. The HOAs fees-- together with water, garbage, and other local services-- continue to accumulate on a monthly basis. The debtor has actually frequently moved along and can not lease the home. However be guaranteed, the owner's liability for these recurring costs are not released by the personal bankruptcy as they occur post-petition. And he or she will stay on the hook for brand-new, recurring fees till the bank lastly takes over the title to the home. HOAs will typically take legal action against the house owner post-discharge, and they'll strongly look for lawyers' costs, interest, expenses, and whatever else they can think about to recoup their losses. This can sometimes result in 10s of countless dollars of brand-new financial obligation that the recently insolvent debtor will have no hope of discharging for another 8 years, ought to she or he submit personal bankruptcy once again.
This problem would not develop if mortgage lenders would foreclose quickly in the context of an insolvency debtor who surrenders a home. We as personal bankruptcy lawyers can literally plead that lender to foreclose already-- or, better yet, accept a deed-in-lieu of foreclosure, but to no avail. They just don't want the home. What suggestions, then, should we give to debtors in this scenario? The options are few. If the debtor can hold on till the residential or commercial property really forecloses prior to submitting personal bankruptcy, this would get rid of the problem. However such a delay is not a high-end most debtors can pay for. If this choice is not available, the debtor needs to either reside in the property and continue to pay his or her HOA dues and community services or if the property is a second house, for example, an attempt to lease the residential or commercial property to cover these continuous costs.
In the last analysis, the Bankruptcy Code never ever contemplated this circumstance. Nor did most states' statutes governing property owners' associations. A solution under the Personal bankruptcy Code to force mortgage lenders to take title to gave up real property would be ideal, however given the concerns facing this Congress and its political orientation, we can comfortably say that the possibility of such a legal option is beyond remote.