Many clients “surrender” their house as part of their Chapter 7 bankruptcy and assume that said act will allow them to put their homeowner’s “experience” totally in their rear view mirror. Unfortunately, in the context of dealing with secured debt (such as mortgages or car loans) in bankruptcy, the term “surrender”does not mean what many people think it does. The act of “surrendering” someone’s collateral in bankruptcy only means that you no longer intend to make the mortgage or car loan payments associated with the collateral. Although receiving your bankruptcy discharge does eliminate your personal obligation to repay the note and mortgage, you still own the collateral (the house or car) until something happens which divests you of such ownership interest, such as a foreclosure sale, short sale or deed in lieu of foreclosure.
The perception that a Chapter 7 Trustee will take control of all property surrendered by a debtor is simply not true in most instances. The Trustee’s goal is to liquidate assets (ie., sell property) in order to generate funds for a distribution to the creditors. However, if the property in question has no non-exempt equity, the Trustee will abandon the estate’s interest in the property and no liquidation will occur. Further, discharging your personal obligation to repay the mortgage does not somehow make the bank the new owner of the property. The bank will only become the owner of the property (1) if their foreclosure process is completed and the bank is the successful bidder at the auction sale, or (2) if they accept from you a deed in lieu of foreclosure.
There are “pros” and “cons” to remaining the owner of your “surrendered” house after bankruptcy. The “up side” is that, if you choose to do so, you should be able to live there for quite a while without making any mortgage or rent payments, which should help in your efforts to get back on your feet financially (although we do recommend that you continue to keep liability insurance on the property). The “down sides” are numerous, especially if you have vacated the property and moved on with your life:
You cannot force a bank to accept from you a deed in lieu of foreclosure, and in many instances they will simply refuse to do so, especially if there is a second mortgage or other liens on the property. Further, a recent First Circuit Court of Appeals case made it clear that as long as the bank is not trying to squeeze payments out of you, a lender’s failure to commence and prosecute a foreclosure proceeding does not violate the Discharge Injunction. In short, you cannot force the lender to foreclose, so you might be “stuck” for a while with the burdens of property ownership. Bankruptcy can be a very effective tool for discharging debt, including mortgage obligations, but it is less effective when it comes to undoing all of the incidents of property ownership. Like most things, you take the good with the bad.