What Happens When I Let My House Go as Part of a Bankruptcy? Do I Owe Anything Else?

When a debtor decides to surrender a house in bankruptcy, there are many considerations.
  1. First, it is important to know that there is no mechanism to actually turn over title and possession to the lender in bankruptcy. The lender will have to take action outside of bankruptcy to obtain possession of the house through a trustee’s sale (foreclosure), short sale or deed in lieu of foreclosure (the latter two of which require the active cooperation of the debtor).
  2. The Mortgage. The bankruptcy discharge will almost always discharge any obligation the debtor might have had to the lender. However, there are other obligations which are not discharged or are not fully discharged.
  3. HOA Fees. Most importantly, home owners association fees and assessments that are assessed after the filing of the bankruptcy case are not discharged. (Pre-filing assessments are discharged.) So, it is important to pay post-petition HOA fees and assessments.
  4. Property Taxes. Property taxes are not technically discharged in bankruptcy, but as a practical matter, the property taxes will be paid by the next owner of the property (whether that be the lender or the next purchaser).
  5. Insurance. Until formal title is transferred on the official county records, the debtor is responsible for everything that happens on the property. So, for example, if someone injured themselves on the property and the owner of the property would liable for the injury, the debtor might be liable for that. Consequently, it is very important to keep insurance on the property until a deed has been recorded transferring the property to someone other than the debtor.
  6. Maintaining the Property. Most municipalities and HOA’s have requirements about how each property is maintained. For example, there may be a requirement to keep the grass watered and mowed, or there may be a requirement to keep a pool maintained properly. Liability for such maintenance requirements will not be discharged in a bankruptcy proceeding. Consequently, the debtor should plan to maintain the property until the deed transferring the property is recorded.
  7. Debtors often ask when they should move out of the house. Because of the substantial requirements of maintaining the property and keeping insurance on the property, I usually recommend that debtors stay in the property until shortly before a foreclosure. There are several reasons for this. It allows the debtor to save money to use for a rental. The debtor will be able to monitor the property and maintain it without having to also maintain another property. Often, the mortgage servicer takes a long time to foreclose. I have had clients where the lender has taken 3 years to finish a foreclosure where the client wanted the foreclosure to happen and did nothing to stop the foreclosure. That would be a long time to have to take care of two houses. If, however, the debtor lived in the house during that time, the debtor would be able to save a significant amount in rent, which could be used for future rent or even a significant down payment on a house in the future.