My colleague, Jed Berliner, wrote recently about getting stuck with a home that your thought you surrendered in a bankruptcy case to your mortgage lender. Yes, Virigina, the American dream is dead, dead, dead,
But there is a way to avoid getting stuck with real estate after a bankruptcy, but it all depends on where you live. Unfortunately, this requires understanding a fine distinction in real estate law theory. Stay with me folks, even a lot of lawyers missed this one in law school, but it is not so difficult to understand.
When you get a mortgage to buy or refinance your home, you give the lender a lien on the property as collateral. That’s easy enough to understand. Just like getting a car loan, the lender wants something to assure that you will repay the loan. Fail to pay and the property gets repossessed. In real estate terms, it is called foreclosure.
However, depending on how the law of mortgages developed in your state, there are different architectures for the mortgage loans. The common theory is the lien theory. Just like with car loans, the mortgage is a lien on the title to your house and the lender can repossess it. A foreclosure is required in order to fix the title in the lender. But in some states with a deep connection to Merry Ole’ England, the theory is different.
In those states, mortgages are not a lien on the title to your house, you are in reality giving the title to your home to the lender only with a right to get it back when the loan is repaid. This is more akin to a pawn broker. You give something of value to the pawnbroker and he gives it back when your repay the loan. In title theory states, the lender already owns your house and all you have to do is give up the right to get it back. This is called the right of redemption. While you cannot force a lender to foreclose, you can eliminate the need to do so. Since you have given up the right to get the property back, there is nothing to foreclose. The lender is now the owner.
Now procedures can vary from state to state in Bankruptcy Court so the most important part is to find an experienced and knowledgeable attorney to help you through this process.