Historically, people have filed chapter 13 bankruptcies in order to stop foreclosures, and allow borrowers to pay off outstanding mortgage payments. Recently though, due to the decline in home values, many more people are looking to give up their properties in chapter 13 filings. Chapter 7 bankruptcy is usually a better idea if someone is planning on surrendering their property, but unfortunately that’s not always feasible. Not everyone is eligible for chapter 7, due to too much income or another recent chapter 7 filing, and sometimes it’s just more appropriate to file chapter 13, such as someone having too much non-dischargeable debt, a non-exempt property they don’t want to lose, or wanting to avoid giving up secured debts such as a car.
A recent national trend, noted by the Wall Street Journal, is where during a foreclosure sale, banks will no longer submit full debt bids, so even after the foreclosure sale is complete, a debt exists on the house, and the mortgage company continues to come after the original owner. Unfortunately, this has pushed many homeowners towards bankruptcy. Chapter 7 would allow them to eliminate their debt and more or less start over, whereas chapter 13 would allow them to reorganize their debt, and improve their credit in the meantime.
With that in mind, what steps are important to take when it comes to surrendering property under a chapter 13 filing?
First off, make sure that any outstanding debt gets discharged or resolved. You want to avoid your loan amount being higher than the value of the house. Any bankruptcy plan that doesn’t specifically address this concern is considered ambiguous, and mortgage companies could take advantage of that fact.
Secondly, make sure that there is clear transfer of responsibility for the property. Many people think that when a chapter 13 filing is complete, the property is no longer theirs, and they can walk away. However, many people get into trouble in the sense that they don’t realize they’re still responsible for property maintenance and upkeep. Most chapter 13 filings simply transfer ownership to the bank, which allows them to sell the property if they choose.
If you go over these two hints with your attorney, a chapter 13 filing should go much smoother.