Over the last 10 or so years, we have seen a decline in the real estate market. It does seem to be improving a bit of late, however, many people have come to us for help because their home or other real estate has little or no equity and has become too burdensome to maintain and afford, particularly those folks with adjustable rate notes!
What Happens When You Purchase Real Estate?
Before we talk about what actually happens to real estate that someone surrenders in bankruptcy, let’s go back to what happens when you purchase real estate. When you purchase real estate and borrow money to do so, there are 3 documents that are the end result of that transaction; the Deed, the Mortgage and the Note.
The deed is pretty easy. We all know that it is a document that shows an ownership interest or legal right to the property. The mortgage is a legal document that conveys a property to a creditor as security (lien) on a note. The note is the financial obligation to pay the mortgage lien. This is where a lot of people, myself included until I began dealing with financial matters on a daily basis, get confused.
Is a Note Different Than a Mortgage?
Many don’t realize that the note and mortgage are two different things. We all refer to our payments as “mortgage payments,” but you are actually paying on the note that is secured by the lien! If there are multiple parties involved in the real estate transaction or residing in the property, it is possible that someone could be a party to the lien but not the note.
This is typical in some states with a husband and wife, usually if one spouse has no income and, therefore, could not make a payment on the note, they may not sign the note, but would typically sign the mortgage giving the mortgage lender a right to enforce the lien upon the person also residing in the property.
However, they would only have the right to enforce the lien itself but not the financial obligation. Basically, If the owner/obligor on the note failed to pay and a foreclosure ensued, the mortgage lender would have the right, pursuant to the mortgage, to evict the person on the mortgage only, but could not report this to his or her credit or try to collect payment.
What Happens to Real Estate That is Surrendered in Bankruptcy?
Now, let’s get to the topic at hand; what happens to real estate that is surrendered in Bankruptcy. As I said before, many clients we counsel are burdened with mortgages that they can no longer afford to keep up or are so underwater that it makes no logical sense to try and sell it. An excellent way to get relief from this financial obligation is to file a petition for bankruptcy.
How Can Bankruptcy Help Me With my Mortgage?
In bankruptcy, a debtor, or obligor on a mortgage note, will surrender his or her interest in the property. This means the person vacates or willingly gives up the property to the holder of the mortgage to enforce their lien against the property. As a debtor in bankruptcy, a person’s financial obligation to pay the note is discharged and the mortgage holder can no longer collect or pursue that individual for payment. The mortgage holder can then exercise their right to the property, usually via a foreclosure sale. Here is where it gets a little tricky!
Although, you have discharged your financial obligation to the property, until the mortgage holder exercises their right to take ownership, the legal title remains in your name. The hope is that your mortgage holder will act quickly to foreclose on the property once you file a bankruptcy and make the decision to surrender your real estate.
Unfortunately, if they don’t, there is no avenue to force them to do so. That is why we advise all of our clients who choose to surrender real estate that they must keep the property upper any municipal codes until a foreclosure sale takes place and a new deed is filed in the appropriate probate court.
We also recommend that you keep insurance in place to avoid any civil liability issues that may arise in conjunction with the property. If the property is your residence, you can continue to reside in the property for several months without making your payments. This allows you to easily upkeep the property. By that, we specifically mean keep the grass cut, the landscape orderly, the utilities on so pipes don’t burst, etc.
Contact a Bankruptcy Attorney for Mortgage Help Today
If you have ANY financial burdens that you are struggling with, we can help you. Whether it is a real estate obligation, credit cards, medical bills, or anything you are struggling with financially, please come it to see one of our attorneys for a free consultation to discuss how we can help you with this burden.
Amy K Tanner is a shareholder in several of the Bond & Botes Law Offices. She holds a Bachelor of Science from Auburn University at Montgomery, and a Juris Doctorate from Thomas Goode Jones School of Law. She focuses primarily on consumer bankruptcy law in the Huntsville and Decatur offices.Read her full bio here.