Although many clients use bankruptcy (in particular, Chapter 13 bankruptcy) as a way to save their home from foreclosure, sometimes hanging on to an underwater, unaffordable home is a financial nightmare. Owning a home comes with many additional costs other than the mortgage. Often, when you factor in additional monthly costs such as mortgage insurance, homeowner’s insurance, property taxes, and HOA dues, the actual monthly cost for a home can be significantly higher than just the monthly mortgage amount.
In either Chapter 7 or Chapter 13 bankruptcy, debtors in California have the option of telling their mortgage lender that they want to “surrender” their home. By indicating this on the bankruptcy forms (the particular form is called the Statement of Intention), the Debtor is simply stating that they don’t want the property any more, and have no intention of continuing to pay the debt attached to it. The bankruptcy discharge eliminates the Debtor’s personal liability for the loan. It does not, however, extinguish the lender’s security interest. The net effect of all this is that the individual is “off the hook;” the lender cannot come after the Debtor personally (sue, garnish wages, levy bank accounts, etc…) but the lender can still foreclose on the property in the future.When a client decides their home has become an albatross they no longer want to try to save, bankruptcy offers options to get out from under the debt. In California, when you have a mortgage loan, there is both personal liability and a security interest in the underlying real estate. Personal liability refers to the obligation that the individual has to repay the loan. The security interest grants the lender a right to foreclose on the property if the loan goes unpaid.
In California, the ability of the lender to “come after” an individual for an unpaid mortgage debt is a complex area of law with overlapping rules. In almost all cases, the lender elects to pursue foreclosure through a noticed Trustee sale. When a home is foreclosed on through a Trustee sale, the lender who initiated the foreclosure (almost always the 1st Mortgage) does not also have the right to pursue a deficiency balance (any money unpaid after the home is sold) from the borrower. If there is a second lienholder on the property (such as a 2nd Mortgage or a Home Equity Line of Credit), then they may have the right to pursue a deficiency against the borrower when the 1st lienholder has foreclosed on the property. In some cases, such as when a 2nd mortgage was taken out as part of a purchase transaction, the 2nd lienholder may not have the right to pursue a deficiency judgment. In any scenario where there could be money owed, a bankruptcy can resolve the problem by letting the homeowner walk away from the property without owing any mortgage lender any money after the home is gone.
To find out if this is an option for you, or if you might have liability to a junior lienholder in the event of a foreclosure, contact us and we’ll be happy to analyze your situation and let you know what your options are. And don’t forget to Like us on Facebook, Follow our Twitter and G+ page for even more Bankruptcy news and updates!