Maybe remarkably, among the most frustrating advancements in our continuous foreclosure crisis relates to home mortgage lenders' obstinate resistance to finish with a foreclosure in a timely way. Many frequently, this circumstance arises in a Chapter 7 Bankruptcy in which the debtor has actually determined that it is in his/her benefit to give up a house.
As all of us understand, mention anti-deficiency laws identify whether a home mortgage lending institution might seek a shortage judgment after a foreclosure. We similarly know that a Bankruptcy Discharge will secure that homeowner from such liability despite what the debtor's state statutes have to state concerning whether a home mortgage lender might look for a deficiency judgment.
While defense from post-foreclosure liability to the home loan lending institution remains a powerful advantage provided by the Insolvency Discharge, a relatively brand-new source of post-bankruptcy petition liability has occurred in the last number of years. One that our customers are all too regularly shocked by if we neglect to provide significantly extensive recommendations prior to, throughout, and after the filing of an insolvency petition.
What I am talking about, of course, are Homeowners Association dues, and to a lesser degree, local water and trash costs. As we all ought to understand well, such repeating fees build up post-petition, and exactly because they recur post-petition, they make up new debt-- and as new financial obligation, the Insolvency Discharge has no impact centurylawfim.com whatsoever upon them.
The typical case involves a Chapter 7 bankruptcy debtor who chooses that she or he can not possibly pay for to keep a house. 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 property, and the lending institution has declined to provide a loan modification regardless of months of effort by the homeowner. The home in all probability will not deserve the secured quantities owed on it for decades to come. The month-to-month payment has adjusted to an installation that is now sixty or seventy percent of the debtor's home earnings. This home must be surrendered.
The problem, of course, is that surrender in personal bankruptcy does not correspond to a timely foreclosure by the loan provider. In days past, state three and even just two years ago, it would. However today, home mortgage loan providers simply don't desire the property on their books. I frequently picture an analyst deep within the bowels of the home loan loan provider's foreclosure department looking at a screen revealing all the bank-owned homes in an offered zip code. This would be another one, and the bank does not desire another bank-owned property that it can not sell at half the quantity it lent just 4 years back. We might go on and on about the recklessness of the bank's choice in having actually made that initial loan, but that is another post. Today the property is a hot potato, and there is absolutely nothing the debtor or the debtor's bankruptcy lawyer can do to force the home mortgage lender to take title to the property.
Thus the problem. There are other parties included here-- most significantly, property owners associations. HOAs have in many locations seen their regular monthly charges drop as a growing number of of their members have defaulted. Their capability to collect on delinquent 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, and even a second mortgage lien, in the days of house appreciation there was almost always sufficient equity in realty to make the HOA whole. But no more. Today HOAs often have no hope of recovering 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? 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 charges-- together with water, trash, and other community services-- continue to accumulate on a month-to-month basis. The debtor has frequently moved along and can not rent the property. But be guaranteed, the owner's liability for these recurring charges are not released by the personal bankruptcy as they arise post-petition. And she or he will remain on the hook for new, repeating fees till the bank lastly takes control of the title to the property. HOAs will generally sue the house owner post-discharge, and they'll strongly seek attorneys' charges, interest, costs, and whatever else they can consider to recover their losses. This can often cause 10s of thousands of dollars of new financial obligation that the recently bankrupt debtor will have no hope of releasing for another eight years, need to he or she file insolvency once again.
This issue would not develop if home mortgage loan providers would foreclose immediately in the context of an insolvency debtor who gives up a house. We as personal bankruptcy attorneys can literally plead that loan provider to foreclose already-- or, even better, accept a deed-in-lieu of foreclosure, however to no avail. They simply do not want the home. What guidance, then, should we provide to debtors in this situation? The options are few. If the debtor can hold on up until the property actually forecloses prior to filing personal bankruptcy, this would remove the problem. However such a delay is not a high-end most debtors can manage. If this alternative is not readily available, the debtor should either reside in the home and continue to pay his or her HOA fees and local services or if the property is a 2nd home, for instance, an attempt to lease the residential or commercial property to cover these ongoing expenses.
In the final analysis, the Bankruptcy Code never ever pondered this situation. Nor did most states' statutes governing house owners' associations. A remedy under the Personal bankruptcy Code to oblige home loan lenders to take title to surrendered real property would be perfect, but given the issues facing this Congress and its political orientation, we can comfortably state that the possibility of such a legislative solution is beyond remote.