Perhaps surprisingly, among the most discouraging developments in our continuous foreclosure crisis relates to home mortgage lending institutions' obstinate resistance to execute with a foreclosure in a timely manner. Many frequently, this situation develops in a Chapter 7 Insolvency in which the debtor has figured out that it remains in his or her best interest to surrender a house.
As all of us understand, state anti-deficiency laws identify whether a home mortgage loan provider may look for a deficiency judgment after a foreclosure. We also understand that a Personal bankruptcy Discharge will protect that house owner from such liability regardless of what the debtor's state statutes have to say concerning whether a home loan lending institution might seek a shortage judgment.
While defense from post-foreclosure liability to the mortgage lender remains a powerful benefit offered by the Bankruptcy Discharge, a reasonably new source of post-bankruptcy petition liability has arisen in the last number of years. One that our clients are all too regularly shocked by if we neglect to use progressively thorough recommendations prior to, during, and after the filing of an insolvency petition.
What I am discussing, of course, are Homeowners Association fees, and to a lesser level, municipal water and garbage fees. As we all need to know well, such repeating costs accumulate post-petition, and specifically because they recur post-petition, they make up new financial obligation-- and as new financial obligation, the Insolvency Discharge has no result whatsoever upon them.
The typical case includes a Chapter 7 insolvency debtor who decides that he or she can not possibly pay for to keep a house. Maybe this debtor is a year or more in arrears on the very first home loan. Maybe the debtor is today (as is common here in California) $100,000 or more undersea on the home, and the lender has actually declined to use a loan adjustment in spite of months of effort by the house owner. The home in all likelihood will not be worth the protected amounts owed on it for years to come. The monthly payment has actually gotten used to an installment that is now sixty or seventy percent of the debtor's home earnings. This home needs to be surrendered.
The issue, of course, is that surrender in bankruptcy does not relate to a timely foreclosure by the loan provider. In days past, state three or even simply two years ago, it would. But today, home loan lending institutions simply don't desire the home on their books. I frequently envision an expert deep within the bowels of the mortgage lending institution's foreclosure department taking a look at a screen revealing all the bank-owned properties in a given zip 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 amount it lent simply 4 years earlier. We might continue about the recklessness of the bank's choice in having made that original loan, but that is another article. Today the home is a hot potato, and there is absolutely nothing the debtor or the debtor's personal bankruptcy attorney can do to force the mortgage loan provider to take title to the home.
Hence the dilemma. There are other parties included here-- most notably, property owners associations. HOAs have in many areas seen their monthly charges plunge as a growing number of of their members have defaulted. Their ability to collect on delinquent association charges was long thought to be protected by their ability to lien the property 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 almost constantly adequate equity in property to make the HOA whole. But no more. Today HOAs often have no hope of recuperating unpaid from the equity in a foreclosed home.
So, where does this all leave the personal bankruptcy debtor who must surrender his/her home? In between the proverbial rock and a difficult place. The loan provider might not foreclose and take the title for months, if not a year after the insolvency is submitted. The HOAs charges-- along with water, trash, and other local services-- continue to accumulate on a month-to-month basis. The debtor has typically moved along and can not lease the residential or commercial property. But be ensured, the owner's liability for these recurring costs are not discharged by the bankruptcy as they develop post-petition. And he or she will remain on the hook for brand-new, repeating charges until the bank lastly takes over the title to the property. HOAs will usually take legal action against the house owner post-discharge, and they'll aggressively look for lawyers' costs, interest, costs, and whatever else they can consider to recoup their losses. This can often lead to tens of thousands of dollars of brand-new debt that the recently bankrupt debtor will have no hope of discharging for another eight years, must he or she submit bankruptcy once again.
This problem would not occur if home loan lenders would foreclose promptly in the context of a bankruptcy debtor who surrenders a home. We as insolvency lawyers can literally ask that lender to foreclose currently-- or, even better, accept a deed-in-lieu of foreclosure, but to no avail. They merely don't desire the residential or commercial property. What recommendations, then, should we give to debtors in this situation? The options are few. If the debtor can hang on till the property actually forecloses prior to filing bankruptcy, this would eliminate the problem. However such a hold-up is not a luxury most debtors can pay for. If this option is not offered, the debtor should either live in the home and continue to pay his/her HOA fees and community services or if the residential or commercial property is a 2nd house, for example, an attempt to lease the home to cover these continuous expenses.
In Century Law Inc yelp the last analysis, the Personal bankruptcy Code never considered this scenario. Nor did most states' statutes governing house owners' associations. A treatment under the Bankruptcy Code to compel mortgage loan providers to take title to surrendered real estate would be perfect, but provided the concerns facing this Congress and its political orientation, we can conveniently state that the possibility of such a legislative solution is beyond remote.