When people consider filing bankruptcy, one of the assets they usually look to protect is their homes. However, sometimes it makes more financial sense for a debtor to let a home go during the bankruptcy process. It is important for those considering Chapter 7 bankruptcy to understand the mechanics of surrendering a home in Chapter 7 bankruptcy and the impact it has on the person filing bankruptcy.
Statement of Intention
When a person files Chapter 7 bankruptcy, he or she needs to include a Statement of Intention in the petition that he or she wants to surrender his or her house. The statement needs to list the property's address and any creditors who have liens on the property.
One of the protections that bankruptcy offers is an automatic stay on the collection actions of the filer's creditors, including foreclosures on homes. When the debtor files the Statement of Intent to surrender a property, however, creditors with liens on the property can petition the court to lift the stay so that the mortgage holders can begin the foreclosure process.
Once the bankruptcy court has lifted the stay on the property, the mortgage lender may begin foreclosure proceedings. To establish proper title to the property, the mortgage lender needs to foreclose on it, even though the owner has already given notice of intent to surrender the property. This process also works to extinguish all of the liens on the property so that the lender may then sell the property to another buyer.
The time that the lender takes to foreclose depends on the state laws governing foreclosure where the property is located and the amount of foreclosures the lender is already handling.
Once the debtor surrenders the property in the Chapter 7 bankruptcy process, he or she is no longer personally liable for the mortgage. One of the benefits of filing bankruptcy is that if there is a deficiency in the amount between what the debtor owes on the mortgage and the amount for which the lender sells the property in foreclosure, the bankruptcy court views that amount as unsecured debt and will discharge it in the bankruptcy debt discharge. The lender may not seek a judgment against the debtor for the shortfall after the bankruptcy discharge.
Choosing to surrender a home in bankruptcy is a big decision and one that a person should not make without seeking advice. If you are considering bankruptcy, contact an attorney who can advise you of all of your options and help you decide the best course of action for your situation.