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What Liability Remains if I Surrender my House or Car in a Bankruptcy?

Filing a Chapter 7 can be a great tool for consumers, which potentially allows them to walk away from a debt that they can no longer afford; such as large house or car payments. Anytime a consumer files for bankruptcy, their obligation on their secured debts is automatically extinguished. It is up to the debtor whether or not they want to continue with those obligations through the “reaffirmation” process which has been discussed in previous posts.

So how does it work? Once you file a bankruptcy, your secured creditors can no longer sue you in your personal capacity; their only recourse is either repossessing or foreclosing on their collateral, but you could walk away unscathed. This means that if you are in the middle of a foreclosure proceeding, once you file a Chapter 7, you are no longer on the hook for what is owed on any possible deficiency.

An example of this would be: Dave owes the bank $100,000 on his mortgage, but his house is only worth $50,000.The bank had started foreclosure proceedings against Dave, but had not actually foreclosed. Dave decided to file a Chapter 7 bankruptcy. Once the creditor files a motion to lift stay, the creditor can continue with the foreclosure, but Dave would no longer be responsible for a deficiency balance (i.e., the $50,000 he would have owed had the bank foreclosed without the bankruptcy). However, the title to the property will remain with the debtor until the bank actually forecloses on the property and a new owner is established.

This sometimes comes as a shock to people, but sometimes the bank won’t foreclose right away. In fact, sometimes it can take years for a bank to foreclose. The bankruptcy has discharged all of the balance on the mortgage owed by the debtor, but sometimes there can be additional post-petition expenses associated with the property that won’t actually be covered by the bankruptcy, most commonly these are property taxes, expenses for upkeep, and homeowner’s association dues. Remember, you are the owner of the property until the bank actually forecloses and sells the property to someone else.

In many states, including Texas, property taxes are assessed and due on the first of the year. Whoever owns that property on January 1st is responsible for the taxes for that year. Typically, homeowners’ fees and upkeep for the property are owed by the owner of the property, despite the bankruptcy. So if you are surrendering property in a bankruptcy, it is greatly in your interest to get a property out of your name as soon as possible. This can be done in several ways; typically deed-in-lieu of foreclosure and short sales are good options. The main idea is to get the property out of your name as fast as you can to cease any ongoing liability on a property that you no longer occupy.

If you have questions about how surrendering property in a bankruptcy works, contact the knowledgeable attorneys at the Fears Nachawati Law Firm for a free consultation here, or call our office at 1.866.705.7584. We are willing and obliged to assist you, and answer any and all questions you have.

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