Perhaps remarkably, one of the most aggravating advancements in our continuous foreclosure crisis relates to home loan loan providers' obstinate resistance to carry through with a foreclosure in a timely way. The majority of commonly, this situation arises in a Chapter 7 Bankruptcy in which the debtor has identified that it remains in his or her best interest to surrender a house.
As all of us know, state anti-deficiency laws figure out whether a mortgage loan provider might look for a shortage judgment after a foreclosure. We also know that a Personal bankruptcy Discharge will secure that homeowner from such liability regardless of what the debtor's state statutes need to state worrying whether a home loan loan provider may seek a deficiency judgment.
While defense from post-foreclosure liability to the home loan lender remains a powerful advantage offered by the Personal bankruptcy Discharge, a relatively brand-new source of post-bankruptcy petition liability has developed in the last couple of years. One that our clients are all too often amazed by if we disregard to provide progressively extensive advice prior to, during, and after the filing of an insolvency petition.
What I am talking about, of course, are Homeowners Association charges, and to a lower degree, community water and trash costs. As all of us should know well, such repeating costs build up post-petition, and precisely because they repeat post-petition, they make up new debt-- and as new financial obligation, the Personal bankruptcy Discharge has no effect whatsoever upon them.
The typical case includes a Chapter 7 insolvency debtor who chooses that she or he can not potentially manage to keep a house. Perhaps this debtor is a year or more in arrears on the first home mortgage. Perhaps the debtor is today (as is common here in California) $100,000 or more undersea on the property, and the lender has actually declined to provide a loan adjustment despite months of effort by the homeowner. The home in all probability will not deserve the secured amounts owed on it for years to come. The monthly payment has adjusted to an installation that is now sixty or seventy percent of the debtor's home income. This home should be surrendered.
The issue, of course, is that surrender in insolvency does not relate to a prompt foreclosure by the lender. In days past, say three and even simply 2 years back, it would. However today, home loan lenders simply do not desire the property on their books. I Century Law BBB frequently envision an analyst deep within the bowels of the home loan lender's foreclosure department looking at a screen revealing all the bank-owned homes in a given postal 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 ago. We could continue about the recklessness of the bank's choice in having 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 insolvency lawyer can do to force the home mortgage lending institution to take title to the residential or commercial property.
Thus the problem. There are other parties included here-- most significantly, homeowners associations. HOAs have in numerous locations seen their regular monthly dues plummet as a growing number of of their members have actually defaulted. Their ability to gather on overdue association fees was long thought to be protected by their capability to lien the home and foreclose. Even if their lien was subordinate to a first, or even a second mortgage lien, in the days of home gratitude there was almost constantly adequate equity in real estate to make the HOA whole. However no more. Today HOAs often have no hope of recovering unpaid from the equity in a foreclosed home.
So, where does this all leave the insolvency debtor who must surrender his/her home? Between the proverbial rock and a hard place. The loan provider may not foreclose and take the title for months, if not a year after the insolvency is filed. The HOAs dues-- together with water, trash, and other municipal services-- continue to accrue on a month-to-month basis. The debtor has often moved along and can not lease the property. However be assured, the owner's liability for these repeating costs are not released by the personal bankruptcy as they develop 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 normally take legal action against the homeowner post-discharge, and they'll strongly look for lawyers' costs, interest, expenses, and whatever else they can think of to recoup their losses. This can often lead to tens of countless dollars of new debt that the recently insolvent debtor will have no hope of discharging for another eight years, should he or she submit insolvency once again.
This issue would not emerge if home mortgage lenders would foreclose quickly in the context of an insolvency debtor who gives up a home. We as bankruptcy lawyers can actually beg that lending institution to foreclose already-- or, better yet, accept a deed-in-lieu of foreclosure, but to no avail. They just do not want the home. What guidance, then, should we give to debtors in this circumstance? The options are couple of. If the debtor can hold on until the home in fact forecloses prior to filing insolvency, this would eliminate the issue. But such a delay is not a high-end most debtors can manage. If this alternative is not readily available, the debtor needs to either live in the home and continue to pay his or her HOA charges and local services or if the property is a second home, for instance, an effort to rent the property to cover these ongoing costs.
In the final analysis, the Personal bankruptcy Code never pondered this situation. Nor did most states' statutes governing property owners' associations. A remedy under the Personal bankruptcy Code to oblige mortgage lenders to take title to surrendered real property would be perfect, but provided the problems facing this Congress and its political orientation, we can easily say that the possibility of such a legal option is beyond remote.