Filing Chapter 13 is a great way to catch up on your past due mortgage arrears, but there are many instances in which a debtor may wish to downsize, be free of stifling HOA dues and costly home maintenance, or simply enjoy the freedom of renting for a while. Perhaps you have a rental home that is no longer profitable, and you want the lender to take it back. Chapter 13 allows you to surrender your home to the mortgage lender in satisfaction of their secured claim. The difference between the balance of the loan and the value of the home at foreclosure will be lumped into the general unsecured creditor class. In most cases, your plan payment will not be affected.
But your lender doesn’t always foreclose after confirmation of the Chapter 13 plan. Sometimes, for whatever reason, they decide to just wait out the 5 year Chapter 13 plan. Each lender has a different policy on whether or not they will foreclose on a home you wish to surrender, but most actually do pull the trigger and take the home back.
In cases where the lender is slow to foreclose, you may still be held liable for the post-bankruptcy property taxes, insurance, city or county fines, damage claims against the property owners, and home owners association dues that arise after your petition is filed, but not the monthly mortgage obligation since your personal obligation on the loan is wiped out through the bankruptcy.
So the question remains: what are your options to get this property out of your name so you aren’t saddled with these financial obligations?
- Prior to filing bankruptcy and after consulting with your attorney, negotiate with your lender to have them take a deed in lieu, perform a short-sale, or consent to a foreclosure judgment just to get the property out of your name. This can be surprisingly successful, though time consuming, and time is often not a luxury one has in the middle of a financial crisis.
- Transfer the property to another person or entity by quitclaim deed prior to filing. Be careful with this option. Transferring any of your property right before you file bankruptcy often raises red flags with the trustee. You may have equity in the property that the trustee thinks you are trying to hide form creditors. If so, your case could get referred to the U.S. Trustee, the entity tasked with preventing abuse and fraud in connection with filing bankruptcy.
- Transfer your home to the mortgage lender through your Chapter 13 plan. This has not yet been tried in Georgia, but in In re Rosa, No. 13-00630 (Bankr. Hawaii July 8, 2013), Judge Farris approved a clever plan by the debtor’s attorney to transfer the home back to the lender through the language of the Chapter 13 plan.
In Rosa, the debtor used section 1322(b)(9) of the bankruptcy code to transfer the property back to the lender. Section 1322(b)(9) states that you may provide for the “vesting” of property of the estate,upon confirmation of the plan, back to yourself or to any other entity. Ms. Rosa’s plan provided that her home “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.”
She was successful in transferring ownership of her home back to the lender, over the Chapter 13 trustee’s objection, by including this language in the plan. The order confirming the plan acted as a deed of conveyance that she could then file in the county property records to evidence the new ownership by the bank.
The trustee argued that the surrender of the property is not tantamount to a transfer of title, but the court pointed out that the plan went beyond merely surrendering the property. It affirmatively “vested” the property in the lender pursuant to section 1322(b)(9) of the code.
It is important to note that the plan was served on City National Bank, who did not object. If the creditor had objected, I do not think the judge would have reached the same conclusion. In this case, the silence of the creditor was taken as acquiescence to its plan treatment. While the court can order the transfer of the property over the creditor’s objection, the judge could easily compare the situation to a quitclaim deed in which the recipient has to accept. Or perhaps the court would view the transfer over the creditor’s objection as a violation of their state law right to foreclose and pursue a deficiency. Either way, hopefully the situation will arise in Georgia where an attorney will have the opportunity to try this novel method of forcing the lender to take back an unwanted home.