The Pros and Cons of Remaining the Owner of Your “Surrendered” House After Bankruptcy

When you file for bankruptcy and decide to “surrender” your home, many people assume that surrendering the property means they no longer have any obligations or ties to it-that they are simply “walking away”.  They mistakenly believe that the Bankruptcy Trustee will sell the property to pay the creditors.  This is in fact quite rare as usually, there is little equity, above and beyond the mortgage debt which encumbers the property.  In most cases, surrendering your home doesn’t immediately sever your ownership. The You will remain the owner of your home for some time, often until the lender forecloses or an alternative resolution is made, such as a deed in lieu of foreclosure. In rare cases, if there is equity in the home above and beyond mortgage amounts and any bankruptcy exemptions you might have, a Chapter 7 Trustee may try to market the property and distribute net proceeds to unsecured creditors.   The decision to keep the property while it’s in this limbo state may seem appealing at first, but there are both benefits and drawbacks that you should consider before deciding to hold on to the house.

Let’s break down the pros and cons of remaining the owner of a surrendered property after filing for bankruptcy.

Pros of Remaining the Owner of Your Surrendered House

 

1. You Retain Some Control During the Transition  Even though you may not be able to afford to keep the home, being the legal owner of the property during the bankruptcy process allows you some control over how things unfold. If the mortgage lender agrees to a deed in lieu of foreclosure, for example, you can voluntarily transfer the title back to the lender without going through the full foreclosure process. This option can be less stressful and more dignified than waiting for the lender to begin formal foreclosure proceedings.
2. You Can Still Live in the Home (for a Time) After you surrender the property in bankruptcy, you may still be able to live in the home until the lender takes action, whether through foreclosure, a deed in lieu, or another method. This can provide temporary stability and give you time to make other housing arrangements. The length of time you remain in the home depends on the lender’s actions, whether or not your Bankruptcy Trustee will try to market the property, and state-specific foreclosure timelines (in Michigan, there is a 6 month redemption period after the sheriff’s sale date), but you often have several months to live in the property without making mortgage payments.
3. Potential for “Cash for Keys” or Deed in Lieu Negotiation  In some cases, the lender may offer you a “cash for keys” deal or agree to a deed in lieu of foreclosure. A deed in lieu of foreclosure allows you to voluntarily transfer ownership of the property to the lender, which can help you avoid the lengthy foreclosure process and the negative consequences associated with it. If you negotiate well, you may even receive some financial assistance or compensation, which can ease your transition.
4. No Immediate Risk of Losing Equity  While this scenario is rare, in some cases, you may have equity in your home that exceeds the amount owed on the mortgage. If you surrender the property and continue to own it until the lender forecloses, you might be able to sell it and keep some or all of the equity, especially if foreclosure has not yet occurred. It’s important to discuss this option with your bankruptcy attorney, as selling the home may complicate or impact your bankruptcy case.

 

Cons of Remaining the Owner of Your Surrendered House

 

1. HOA Fees and Other Property Costs Remain Your Responsibility  One of the most significant drawbacks of remaining the owner of a surrendered house is that you’re still responsible for the costs associated with the property, even if you no longer have the means to afford them. This includes ongoing homeowner association (HOA) fees, property taxes, and any necessary maintenance or repairs. While you may no longer be paying the mortgage, you could still be held liable for these expenses until the property is officially transferred or foreclosed upon. HOA fees can be especially burdensome, as they continue to accrue whether you live in the property or not, and failing to pay them could result in additional penalties or legal actions.
2. You Are Still the Legal Owner Until Foreclosure or Transfer  Even though you’ve surrendered the house in bankruptcy, you’re still technically the owner of the property until the title is officially transferred to the lender through foreclosure or a deed in lieu of foreclosure. This means you retain responsibility for the upkeep of the property and must continue to deal with any legal obligations that arise. If you fail to properly maintain the home, for example, you could be sued for damages or held liable for other violations, such as zoning or municipal code infractions.  This means maintaining the property such as removing snow as ice as required to prevent slip and falls, cutting the grass and removing garbage so as to prevent blight, etc.  Be sure to maintain any liability insurance to protect you should people become injured on the property.
3. Emotional Burden and Stress  For many, staying in the home for an extended period after filing bankruptcy can have an emotional toll. The idea of “surrendering” your home is already emotionally challenging, and continuing to live there under the specter of foreclosure or transfer can make it even harder to move on. The stress of knowing that you’ll eventually have to leave, and the uncertainty surrounding how long you’ll be able to stay, can be draining.
4. Chapter 7 Trustee may Sell the Property  In most cases there is little or no equity in a property that a bankruptcy debtor is surrendering as the mortgage balances, back taxes or both outweigh the value of the home.  In these cases, the Bankruptcy Trustee, whose job is to sell property for the benefit of creditors, will likely simply abandon the asset to the debtor.  In rare cases however, there will be money available to pay unsecured creditors above and beyond the mortgages, tax liens and exemptions claimed by the debtor.  In this scenario, the Chapter 7 Trustee will move quickly to hire a realtor and sell the property to generate cash to pay creditors.  This could substantially reduce the time a debtor will be able to live in the property, especially if the Trustee is able to sell the home quickly.

The Pros and Cons of Remaining the Owner of Your “Surrendered” House After Bankruptcy: The Bottom Line

 

Remaining the owner of a surrendered house after bankruptcy is not a decision to be made lightly. While it does offer some time and control over the situation, it also comes with responsibilities that you may not be able to afford, such as HOA fees and property taxes. The emotional toll of staying in the property while awaiting foreclosure or other resolution can also be significant.

Ultimately, whether this approach is right for you depends on your financial situation, your goals, and your ability to manage the property during this period. Consulting with an experienced bankruptcy attorney is crucial to understanding your specific circumstances and the options available to you. Together, you can devise a strategy that best supports your financial recovery and peace of mind.

If you’re facing the prospect of surrendering your home and have concerns about your responsibilities during and after bankruptcy, feel free to Contact us for a free consultation. Let’s explore the best path forward for your financial future.