Recently on our bankruptcy forum a user asked, “I have decided to file Chapter 7 Bankruptcy. I won’t be able to afford to keep my house. Will the bankruptcy discharge any of the mortgage debt? Will I owe any money after a home surrender back to the bank? What are the first steps for me to take?”
Chapter 7 bankruptcy can be a good way for many debtors to discharge certain unsecured debts. Unfortunately, because Chapter 7 is a liquidation bankruptcy some debtors may find that certain assets are not protected and must be sold or liquidated to generate income to repay creditors.
Now, before you take any steps, it is a good idea to talk to a bankruptcy lawyer. Not everyone will qualify to file Chapter 7 bankruptcy. In fact, many high income earners will have to file Chapter 13 instead and repay a portion of their debts over 3 or 5 years.
Although Chapter 13 may take longer and be a bit more complicated, if you did want to retain certain assets, such as your home, Chapter 13 might be a nice option for you.
Chapter 7 bankruptcy and your home surrender
Let’s assume for this discussion, however, that you know that you qualify for Chapter 7 and you have already determined that your home is not protected through state or federal exemptions. Let’s also assume that you have run the numbers and know that you cannot afford to keep your home.
Your home is a secured asset, which means your home is collateral for the mortgage loan. So unlike unsecured debt which can be discharged in bankruptcy, secured debt is not discharged but rather repossessed by the lender to repay the debt.
What does this mean for you? Instead of forcing the bank to foreclose on your home you do have the option to voluntarily surrender your property. If you choose this option you will make a note of this on your Statement of Intention bankruptcy form.
After your lender is notified by the bankruptcy court of your intention to surrender, they will file a Motion for Relief from Stay. This is necessary to lift the automatic stay that was instituted when you filed for bankruptcy and were protected against foreclosure. At this point you can expect the motion to be approved and for the lender to start the repossession process.
Can I stay in my house for a while after the home surrender?
Legal experts generally suggest staying in your home after a home surrender until the foreclosure date. There are several reasons for this suggestion. First, it can take months for the home surrender to lead to the foreclose on your home and while you wait you may still be responsible for certain payments including HOA dues, utilities, insurance and any city or municipal requirements such as lawn care and maintenance. You must continue to pay these bills and you should keep the property maintained.
When you decide to move you will need to leave the house in good condition, remove all of your possessions, and write a letter to each mortgage holder.
A home surrender is an important decision and every debtor’s situation is different. Talk to a bankruptcy lawyer before you make any final decisions regarding your home.
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