Forcing the Mortgage Holder to Take Back a Home through Chapter 13

Using bankruptcy to surrender a home that has become unaffordable is nearly as common as using bankruptcy to stop a foreclosure so that a home can be retained. The question whether to keep a home when filing bankruptcy is usually answered by comparing the amount of the home’s monthly mortgage payments with the income the debtor is able to devote to housing payments. If the payments are no longer affordable, the debtor might choose to surrender the home as part of either a chapter 7 or chapter 13 bankruptcy filing.

However, in practice this is sometimes more difficult than it would seem at first glance. Mortgage companies are often slow to foreclose on homes that are surrendered to the lender in bankruptcy, leaving the home vacant, and still technically under the ownership of the bankruptcy debtor, for months or even years after the bankruptcy was filed.

The slow-to-foreclose mortgage company can create a host of problems for the surrendering-the-home bankruptcy debtor, who could be held liable for post-bankruptcy homeowners association fees, property assessments, other ownership related financial obligations (but not the monthly mortgage payments, the personal obligation for which the debtor was discharged in the bankruptcy), or property owner liability for injuries occurring at the vacant home.

However, a recent ruling from a Hawaii bankruptcy court approved an ingenious solution to the problem of the non-foreclosing lender. This chapter 13 decision, In re Rosa, No. 13-00630 (Bky. Hawaii July 8, 2013), approved over the objections of the chapter 13 trustee a chapter 13 plan which contained a provision designed to solve this problem by conveying the home back to the first mortgage holder.
In the Rosa case, the debtor’s chapter 13 plan stated that title to the real estate “shall vest in City National Bank/OCWEN Loan Service upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Bureau of Conveyances.” The chapter 13 trustee objected, arguing that a “surrender” under the bankruptcy law did not transfer ownership of the surrendered property until the lender actually foreclosed.

The court disagreed with the trustee and pointed out that here, the debtor had gone beyond merely “surrendering” the property in the chapter 13 plan. Rather, the chapter 13 plan plainly stated that confirmation of the plan by the court would transfer ownership to the lender, and that the order confirming the plan would be recorded like any other deed of conveyance. The lender had been served with this plan and it had not objected to the plan in court. The plan was therefore confirmed over the objections of the chapter 13 trustee.

The result of this strategy for this debtor was a prompt solution to the potential foot-dragging behavior by the lender in foreclosing, which otherwise might have led to years of wrangling by the debtor over unpaid future property assessments.

If you feel “stuck” with a house you no longer desire to keep, call us today to discuss your options and whether a Chapter 13 makes sense for you.

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