In New York bankruptcy it’s possible, but not common, for debtors to unsuccessfully surrender their homes or other real estate. They receive their discharges, exit bankruptcy, and find that they still own the property with a mortgage lien still attached to it. How can something so bizarre happen?
Answer: Just because you say you want to surrender it, doesn’t mean you did.
In bankruptcy, the notice of intent to surrender a property, usually a house in chapter 7, means exactly what it says: You are telling the trustee you want to give up the property, but you don’t actually do so. The trustee might believe the property isn’t worth selling, and the bank might not foreclose on it (and there’s been some evidence of things like that happening in the New York City area). The result is that you end up with a piece of real estate when you said you didn’t want it—and you still have to pay on the mortgage.
The only way to dispose of a property is to sell it, whether by a regular sale, short sale, or deed-in-lieu of foreclosure. Otherwise, legally you will still own the property.
If you’re confused as to why you may have heard stories about people just mailing their house keys to lenders, the reason is probably that it occurred out west. Most states beyond the Mississippi River use what’s called the “title theory” to mortgages, which states that the lender owns the legal title while the borrower has an equitable right to live in or use the home. Once the mortgage is paid, the legal title shifts to the land owner. In these states, because the bank is technically the legal owner, the borrower can easily surrender the equitable right to the bank.
In New York, and other northeastern states, things work differently. They use the “lien theory,” which legally places the home in the hands of the homeowner, meaning they’re the ones stuck with the title if no one wants it.
The greatest risk to an unsuccessful surrender isn’t the nuisance of a reduced credit score for missed mortgage payments. Rather, it’s the liabilities that can attach to landownership that title-holders might have thought they didn’t have. These would be responsibility for injuries to people that occur on the premises (something forced-place insurance probably won’t cover), unpaid taxes, and for condo owners, homeowner association charges.
If you have a property that might not be salable, then you’ll definitely want an experienced New York bankruptcy lawyer to help you “lose” the property to a lender or the trustee.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced landlords rights in bankruptcy Bruce Weiner for a free initial consultation.
