Surrendering Your Home In Bankruptcy Doesn’t Mean It’s Not Yours

by Jay Fleischman, Esq.

May 9, 2012

You walk into bankruptcy to get rid of your mortgage. You walk out still owning real estate. How’s that happen?

It’s almost a joke – when does surrender not mean surrender? It’s not a funny joke, but one nonetheless.

Here’s the tip: when you surrender property in Chapter 7 bankruptcy, you’re doing nothing more than indicating a willingness to let it go. You’re not actually handing it off to anyone.

When you go through Chapter bankruptcy, you’re looking to discharge your obligations. In return, you’re surrendering your property that’s not considered exempt under the bankruptcy laws as applied in your state.

There is, however, nothing in the law that requires the bankruptcy trustee to take the property. Rather, the trustee’s goal is to liquidate and sell property that will yield a financial benefit to the creditors. If he or she looks at something and doesn’t think it’s financially worth it to sell, then no liquidation occurs.

In addition, discharging your personal obligation to repay the mortgage doesn’t mean the bank magically becomes the owner. Rather, the bank’s got to get title to the property either by foreclosure, deed-in-lieu of foreclosure, short sale, or other legal means.

Unless and until the bank takes action and takes back title to the house, however, it’s still legally yours. You’re not personally liable to the bank for any deficiency on the mortgage, but you do own the property.

That means you’ve got to comply with all local laws regarding ownership. Keep the sidewalks clear of debris, trim the trees out front, and the like. If you get a citation after you bankruptcy is filed, you’re going to be on the hook for it.

If we’re talking about a condo or house with a homeowners’ association then you’re going to remain liable for all post-bankruptcy HOA charges. Once again, this is still legally your place.

In the end, it’s for you to realize the impact of your decision to surrender. Take the steps necessary to protect yourself, but also recognize that your liability for some things may not end until the deed is signed over.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

Last modified: April 24, 2012