It would seem that most people who are filing a Chapter 13 bankruptcy would be doing so in order to save their home. However, in some cases, it may be advantageous for the debtor to surrender his or her home through the Chapter 13 bankruptcy. When you are dealing with unmanageable debt, a bankruptcy case may be the best solution to solve your financial problems. As part of that plan, you may o consider surrendering your home through your Chapter 13 case. There are times when it is in your best interest moving forward to voluntarily surrender your home to the mortgage lender.
When to surrender your home during Chapter 13 bankruptcy
There are several reasons you may want to consider surrendering your home through your Chapter 13 plan. For instance, if your mortgage payments are too high and you will be working only to pay your mortgage, the bankruptcy plan and your basis living expenses, you may want to consider surrendering the home and renting a cheaper place to live until your bankruptcy case is ended. This will give you a good opportunity to begin saving for a down payment on a new home, one that you can better afford, while you are in the Chapter 13 case. At the end of your Chapter 13 case, your debts will be discharged and you will be in a good position to purchase a new home.
Moreover, if your mortgage payments are too high, you will be living paycheck to paycheck and will be unable to handle any emergencies that could arise during the bankruptcy case. Because you are not permitted to incur debt during your Chapter 13 case, you must be prepared to handle emergencies without borrowing money. Having a lower rent payment will allow you to prepare for emergencies by saving money each month for an emergency fund.
If you do surrender your home as part of your Chapter 13 plan, any deficiency that remains after the lender liquidates the property will be treated as unsecured debt, provided they file a proof of claim, and paid the same percentage as your other unsecured debt (typically, pennies on the dollar).
Can I surrender my home during the Chapter 13 plan?
Yes, you can surrender you home at any time during the Chapter 13 case; however, if you signed a reaffirmation agreement, there could be serious consequences. Most attorneys discourage clients from signing reaffirmation agreements on a mortgage because the mortgage company cannot force a debtor to enter a reaffirmation agreement on a mortgage. The reason some debtors choose to do this is that they believe that it will help them rebuild their credit quicker because the mortgage company promises to report all of the payments made on the mortgage to the credit reporting agency (some companies stop reporting payments during a bankruptcy case).
Unfortunately, once you sign a reaffirmation agreement with a creditor, you are legally responsible for that debt even though you filed a bankruptcy case. In other words, if you sign a reaffirmation agreement and surrender you home during your Chapter 13 bankruptcy, the lender could foreclose on the home and sue you for any deficiency that remains after the home is sold. The bankruptcy case would not discharge this debt because you entered a reaffirmation agreement. This is the main reason most bankruptcy attorneys discourage clients from signing a reaffirmation agreement for their mortgage. The possible consequences far outweigh the slight benefit.
Can my lender foreclose during my Chapter 13?
As long as you continue making your mortgage payments as scheduled during the bankruptcy case, the lender will have no reason to foreclose on your home even if you were behind on the payments when you filed the bankruptcy case. Any past due payments are being paid through your Chapter 13 plan and the automatic stay prevents the mortgage lender from foreclosing for those past due payments as long as you are in bankruptcy. However, if you fall behind on your regular monthly payments during your Chapter 13 case, the lender may be able to foreclose with permission of the bankruptcy court.
If you fall behind on your mortgage payments during the Chapter 13 case, your lender will file a motion requesting for modification of the automatic stay. In the absence of a compelling reason, the court may grant this motion and allow the mortgage lender to proceed with a foreclosure outside of the bankruptcy. If you have not entered a reaffirmation agreement, the lender will not be permitted to sue you for any deficiency after the home is sold. All of the mortgage debt will be discharged provided that you complete your bankruptcy case. For some debtors this may be the best option if they realize they are unable to continue making the mortgage payments and need a less expensive place to live. By continuing the Chapter 13 case, they will discharge their remaining debts, including the mortgage, so that once the case is ended, they will have a clean slate to begin rebuilding their finances.
Where to go if you need help
Facing a foreclosure is a frightening. It is a stressful time filled with anxiety and you may not know where to turn. The Law Office of Gene F. Turnwald helps people in need find a solution to their financial problems. We help people save their homes but we also help people who are struggling with the decision to give up their home. We understand that it is a difficult decision and you only want to do what is in the best interest of your family. Let us help you make the decision that is best for you and for your family then support you through the entire process so that you can move forward and begin to recover from the situations that caused you to be in financial distress.