Maybe surprisingly, one of the most frustrating developments in our ongoing foreclosure crisis pertains to mortgage lenders' obstinate resistance to execute with a foreclosure in a timely manner. Many commonly, this circumstance arises in a Chapter 7 Personal bankruptcy in which the debtor has actually determined that it is in his or her best interest to give up a house.
As all of us understand, mention anti-deficiency laws figure out whether a home mortgage lending institution may seek a deficiency judgment after a foreclosure. We likewise understand that a Bankruptcy Discharge will protect that homeowner from such liability no matter what the debtor's state statutes need to say worrying whether a mortgage loan provider may seek a shortage judgment.
While protection from post-foreclosure liability to the home mortgage loan provider remains an effective benefit used by the Personal bankruptcy Discharge, a reasonably brand-new source of post-bankruptcy petition liability has actually occurred in the last number of years. One that our customers are all too regularly amazed by if we overlook to use significantly comprehensive advice before, during, and after the filing of a bankruptcy petition.
What I am speaking about, naturally, are Homeowners Association dues, and to a lower degree, local water and garbage fees. As we all need to understand well, such recurring charges accumulate post-petition, and precisely since they repeat post-petition, they make up new financial obligation-- and as brand-new financial obligation, the Bankruptcy Discharge has no effect whatsoever upon them.
The typical case includes a Chapter 7 bankruptcy debtor who chooses that she or he can not potentially pay for to keep a house. Possibly this debtor is a year or more in arrears on the first home loan. Possibly the debtor is today (as is common here in California) $100,000 or more undersea on the home, and the lender has actually refused to offer a loan adjustment regardless of months of effort by the homeowner. The home in all probability will not be worth the protected amounts owed on it for decades to come. The regular monthly payment has adapted to an installment that is now sixty or seventy percent of the debtor's household earnings. This home should be surrendered.
The problem, naturally, is that surrender in personal bankruptcy does not relate to a prompt foreclosure by the lender. In days past, state three or perhaps just two years back, it would. But today, mortgage loan providers simply do not want the property on their books. I typically picture an analyst deep within the bowels of the home mortgage lender's foreclosure department taking a look at a screen showing 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 cost half the amount it provided just four years back. We might continue about the recklessness of the bank's choice in having 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 attorney can do to compel the mortgage lender to take title to the property.
Thus the quandary. There are other celebrations included here-- most especially, property owners associations. HOAs have in many areas seen their month-to-month charges plunge as more and more of their members have defaulted. Their ability to collect on overdue association charges 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 perhaps a second mortgage lien, in the days of house gratitude there was nearly constantly enough equity in real estate to make the HOA whole. But no more. Today HOAs typically have no hope of recuperating past dues from the equity in a foreclosed residential or commercial property.
So, where does this all leave the bankruptcy debtor who must surrender his/her home? In between the proverbial rock and a tough location. The lending institution may not foreclose and take the title for months, if not a year after the bankruptcy is filed. The HOAs dues-- along with water, garbage, and other municipal services-- continue to accumulate on a regular monthly basis. The debtor has typically moved along and can not rent the residential or commercial property. But be guaranteed, the owner's liability for these repeating costs are not released by the insolvency as they emerge post-petition. And she or he will stay on the hook for brand-new, recurring costs until the bank lastly takes over the title to the property. HOAs will normally sue the property owner post-discharge, and they'll aggressively seek attorneys' fees, interest, expenses, and whatever else they can think about to recover their losses. This can sometimes cause 10s of countless dollars of brand-new financial obligation that the recently insolvent debtor will have no hope of discharging for another 8 years, should she or he submit bankruptcy once again.
This issue would not develop if home loan lending institutions would foreclose immediately in the context of a personal bankruptcy debtor who surrenders a house. We as insolvency lawyers can actually plead that lender to foreclose already-- or, even better, accept a deed-in-lieu of foreclosure, but to no avail. They simply don't want the residential or commercial property. What suggestions, then, should we offer to debtors in this situation? The alternatives are couple of. If the debtor can hang on up until the home really forecloses prior to filing personal bankruptcy, this would get rid of the problem. But such a delay is not a high-end most debtors can pay for. If this alternative is not available, the debtor needs to either reside in the home and continue to pay his or her HOA dues and local services or if the property is a second home, for instance, an attempt to rent the residential or commercial property to cover these continuous expenses.
In the final analysis, the Insolvency Code never pondered this situation. Nor did most states' statutes governing homeowners' associations. A treatment under the Insolvency Code to oblige mortgage lending institutions to take title to surrendered real property would be perfect, but offered the concerns facing this century law firm jacksonville fl Congress and its political orientation, we can comfortably say that the possibility of such a legislative option is beyond remote.