Maybe remarkably, one of the most frustrating developments in our continuous foreclosure crisis involves mortgage lending institutions' obstinate resistance to carry through with a foreclosure in a timely way. The majority of commonly, this circumstance emerges in a Chapter 7 Insolvency in which the debtor has actually determined that it is in his or her best interest to surrender a house.
As all of us understand, state anti-deficiency laws identify whether a home loan lender may look for a shortage judgment after a foreclosure. We similarly understand that a Personal bankruptcy Discharge will protect that homeowner from such liability regardless of what the debtor's state statutes have to say concerning whether a home mortgage lending institution may seek a deficiency judgment.
While protection from post-foreclosure liability to the home mortgage lending institution stays an effective advantage used by the Personal bankruptcy Discharge, a reasonably new source of post-bankruptcy petition liability has occurred in the last couple of years. One that our customers are all too frequently amazed by if we disregard to use progressively thorough guidance before, throughout, and after the filing of an insolvency petition.
What I am discussing, obviously, are Homeowners Association charges, and to a lesser extent, municipal water and trash charges. As all of us ought to understand well, such repeating costs collect post-petition, and precisely since they repeat post-petition, they make up new debt-- and as brand-new financial obligation, the Personal 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 potentially afford to keep a home. Possibly this debtor is a year or more in arrears on the first mortgage. Perhaps the debtor is today (as is common here in California) $100,000 or more underwater on the home, and the lending institution has actually declined to use a loan modification despite months of effort by the property owner. The home in all possibility will not deserve the protected quantities owed on it for decades to come. The regular monthly payment has adjusted to an installation that is now sixty or seventy percent of the debtor's family earnings. This house needs to be surrendered.
The issue, obviously, is that surrender in bankruptcy does not relate to a prompt foreclosure by the lender. In days past, state three or perhaps simply two years earlier, it would. But today, home loan loan providers simply don't desire the home on their books. I typically envision an analyst deep within the bowels of the home loan loan provider's foreclosure department taking a look at a screen revealing all the bank-owned properties 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 quantity it lent simply four years back. We might go on and on about the recklessness of the bank's decision in having actually made that original loan, but that is another short article. Today the home is a hot potato, and there is nothing the debtor or the debtor's bankruptcy lawyer can do to oblige the home loan loan provider to take title to the property.
Thus the conundrum. There are other celebrations involved here-- most especially, property owners associations. HOAs have in lots of areas seen their monthly charges drop as increasingly more of their members have defaulted. Their capability to gather on overdue association fees was long thought to be protected by their capability to lien the residential or commercial property and foreclose. Even if their lien was subordinate to an initially, or even a second mortgage lien, in the days of home appreciation there was nearly constantly sufficient equity in realty to make the HOA whole. But no more. Today HOAs often have no hope of recuperating unpaid from the equity in a foreclosed residential or commercial property.
So, where does this all leave the personal bankruptcy debtor who must surrender his/her residential or commercial property? In between the proverbial rock and a hard place. The lending institution might not foreclose and take the title for months, if not a year after the bankruptcy is submitted. The HOAs fees-- in addition to water, garbage, and other municipal services-- continue to accrue on a regular monthly basis. The debtor has actually often moved along and can not rent the home. However be ensured, the owner's liability for these recurring fees are not discharged by the personal bankruptcy as they develop post-petition. And he or she will stay on the hook for brand-new, repeating costs up until the bank lastly takes over the title to the property. HOAs will usually take legal action against the homeowner post-discharge, and they'll aggressively look for lawyers' fees, interest, costs, and whatever else they can consider to recoup their losses. This can often cause tens of thousands of dollars of brand-new financial obligation that the just recently bankrupt debtor will have no hope of releasing for another eight years, must he or she file bankruptcy once again.
This issue would not occur if home loan lenders would foreclose immediately in the context of an insolvency debtor who surrenders a house. We as bankruptcy attorneys can actually beg that lending institution to foreclose currently-- or, even better, accept a deed-in-lieu of foreclosure, but to no avail. They merely don't want the property. What suggestions, then, should we provide to debtors in this circumstance? The options are couple of. If the debtor can hang on until the home in fact forecloses prior to filing personal bankruptcy, this would get rid of the issue. However such a delay is not a luxury most debtors can manage. If this option is not available, the debtor must either reside in the home and continue to pay his or her HOA charges and local services or if the home is a second home, for example, an effort to https://centurylawfirm.com rent the home to cover these continuous costs.
In the last analysis, the Insolvency Code never ever considered this scenario. Nor did most states' statutes governing property owners' associations. A treatment under the Bankruptcy Code to compel home mortgage loan providers to take title to surrendered real estate would be ideal, however provided the problems facing this Congress and its political orientation, we can conveniently say that the possibility of such a legal solution is beyond remote.