Chapter 13 and House Mortgage: Surrender and Discharge in Illinois

by Andy Miofsky, Esq.

February 13, 2008

There are two ways to walk away from a home mortgage loan while in chapter 13, voluntarily and involuntarily.  One voluntary method involves electing to surrender the real estate.  This election can be made at any time during the case, most commonly occurring at the beginning with the original Plan.  Such a plan generally provides that debtor surrenders all interest in the property to the mortgage holder and chooses not to pay on the debt.  Some debtors might initially attempt to keep their house, later to find the payments unmanageable.  Later, these debtors can file an amended plan before a confirmed plan is completed to accomplish a surrender of the real estate.

An involuntary method of surrender occurs when the mortgage holder obtains relief from the bankruptcy stay.  Courts generally grant such relief if mortgage terms, including payments, are not honored during the case.  The mortgage holder is released from the bankruptcy stay and is free to pursue non-bankruptcy remedies.

Illinois is a judicial foreclosure state.  After surrender or relief, the mortgage holder is obligated to initiate a foreclosure proceeding [lawsuit] in state court to obtain clear title to the real estate.  The end result of a judicial foreclosure involves sale of the property.  When a sale occurs for less than the amount of the debt, the resulting deficiency balance remains an obligation of the debtor.  The debtor owes the unpaid balance of the loan. While some states do not permit a deficiency balance, Illinois law treats that debt as unsecured and bankruptcy law allows the debt to be discharged.

A best practice tip involves modifying a plan after relief is granted to clearly define debtor’s intention to surrender the property and to discharge any deficiency balance.

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Andy Miofsky, Esq.

Andy Miofsky is an Illinois consumer rights lawyer with offices in Granite City Illinois and Mount Vernon. Andy represents people with bankruptcy and student loan debt problems throughout the Central and the Southern District of Illinois since 1979.

Last modified: January 15, 2012