Credit Card Debt and Your Retirement Fund

Perhaps remarkably, among the most discouraging advancements in our continuous foreclosure crisis pertains to home loan lending institutions' obstinate resistance to execute with a foreclosure in a prompt manner. Many frequently, this situation emerges in a Chapter 7 Personal bankruptcy in which the debtor has actually identified that it remains in his/her best interest to surrender a home.

As we all understand, specify anti-deficiency laws figure out whether a home mortgage loan provider may look for a deficiency judgment after a foreclosure. We similarly know that a Personal bankruptcy Discharge will secure that homeowner from such liability despite what the debtor's state statutes need to say concerning whether a mortgage lending institution may seek a shortage judgment.


While defense from post-foreclosure liability to the home loan lender stays an effective benefit offered 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 clients are all too regularly shocked by if we neglect to provide increasingly comprehensive recommendations prior to, during, and after the filing of a bankruptcy petition.

What I am speaking about, of course, are Homeowners Association charges, and to a lesser extent, municipal water and garbage fees. As we all should understand well, such repeating charges collect post-petition, and exactly because they recur post-petition, they make up new debt-- and as new financial obligation, the Insolvency Discharge has no effect whatsoever upon them.

The typical case includes a Chapter 7 personal bankruptcy debtor who decides that he or she can not possibly afford to keep a home. Maybe this debtor is a year or more in arrears on the first mortgage. Maybe the debtor is today (as prevails here in California) $100,000 or more undersea on the home, and the lending institution has actually refused to offer a loan modification regardless of months of effort by the house owner. The home in all likelihood won't be worth the secured quantities owed on it for years to come. The month-to-month payment has adjusted to an installation that is now sixty or seventy percent of the debtor's household earnings. This home should be surrendered.

The issue, of course, is that surrender in bankruptcy does not relate to a prompt foreclosure by the lending institution. In days past, say three or even simply two years ago, it would. However today, home loan lenders simply don't want the residential or commercial property on their books. I frequently picture an expert deep within the bowels of the mortgage loan provider's foreclosure department looking at a screen showing all the bank-owned residential or commercial properties in a given zip century law firm pllc code. This would be another one, and the bank does not desire another bank-owned home that it can not sell at half the amount it lent simply four years ago. We might continue about the recklessness of the bank's decision in having actually made that initial loan, but 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 personal bankruptcy lawyer can do to force the home loan lending institution to take title to the property.

For this reason the conundrum. There are other celebrations included here-- most especially, property owners associations. HOAs have in many locations seen their monthly fees plummet as increasingly more of their members have defaulted. Their ability to gather on overdue association fees was long thought to be secured 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 house gratitude there was nearly constantly adequate equity in realty to make the HOA whole. However 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 bankruptcy debtor who must surrender his or her residential or commercial property? Between the proverbial rock and a hard location. The loan provider might not foreclose and take the title for months, if not a year after the personal bankruptcy is filed. The HOAs fees-- together with water, trash, and other community services-- continue to accumulate on a monthly basis. The debtor has typically moved along and can not rent the residential or commercial property. However be guaranteed, 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 remain on the hook for brand-new, recurring charges till the bank lastly takes control of the title to the residential or commercial property. HOAs will usually take legal action against the house owner post-discharge, and they'll strongly seek lawyers' costs, interest, costs, and whatever else they can think of to recoup their losses. This can sometimes result in tens of thousands of dollars of new financial obligation that the recently bankrupt debtor will have no hope of releasing for another 8 years, should he or she submit insolvency once again.

This issue would not occur if mortgage lenders would foreclose promptly in the context of a personal bankruptcy debtor who surrenders a house. We as personal bankruptcy attorneys can actually ask that lending institution to foreclose already-- or, even better, accept a deed-in-lieu of foreclosure, however to no avail. They merely don't desire the home. What advice, then, should we give to debtors in this situation? The options are couple of. If the debtor can hang on up 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 high-end most debtors can pay for. If this choice is not readily available, the debtor must either reside in the home and continue to pay his or her HOA dues and community services or if the home is a 2nd home, for example, an attempt to rent the home to cover these ongoing expenses.

In the last analysis, the Personal bankruptcy Code never contemplated this circumstance. Nor did most states' statutes governing homeowners' associations. A treatment under the Insolvency Code to oblige home loan lenders to take title to surrendered real property would be perfect, but given the problems facing this Congress and its political orientation, we can comfortably say that the possibility of such a legislative option is beyond remote.

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