Does Chapter 7 Bankruptcy Stop the Bank From Taking My House?
Many Florida homeowners are faced with an “underwater” mortgage—that is, the value of their property is less than what they owe to their lender. If you have an underwater mortgage and file for Chapter 7 bankruptcy protection, an underwater mortgage can protect your house from being sold as part of a liquidation proceeding. But it will not prevent the lender from foreclosing on the property and ultimately taking your house.
Boca Raton Couple Ordered to “Surrender” House to Lender Following Bankruptcy
Chapter 7 bankruptcy is designed to “liquidate” a debtor’s estate and provide the debtor with a fresh start. After filing for bankruptcy, the court appoints a trustee to take possession of the debtor’s property (subject to certain legal exemptions), which is then liquidated and used to pay off some of the debtor’s creditors. Any remaining debt is then be discharged by the court.
In the case of a property secured by an underwater mortgage, the trustee will “abandon” the property back to the debtor. While this means the house will not be sold as part of the bankruptcy liquidation, it does not mean the homeowner is free and clear. A bankruptcy discharge absolves the debtor of any legal obligation to repay a creditor, including a mortgage lender, but it does not eliminate any lien against property secured by a loan.
Here is an example of what this means in practice. The U.S. 11th Circuit Court of Appeals recently addressed a bankruptcy case filed by a Boca Raton, Florida, couple who have a house with an underwater mortgage. Prior to filing for bankruptcy, the lender filed a foreclosure action in Florida state court.
The lender asked the bankruptcy judge to order the couple to surrender the house. The lender argued that the debtors could not “surrender” the house to the bankruptcy trustee—who then abandoned the house back to the couple, as described above—while simultaneously opposing its foreclosure action. The bankruptcy judge agreed with the lender and ordered the couple to surrender the house.
The couple appealed, but the 11th Circuit affirmed the bankruptcy judge’s decision. “Even if the trustee abandons the property,” the 11th Circuit explained, the couple’s duty under federal bankruptcy law “to surrender the property to the creditor remains.”
In this context, the law requires surrender to “both the trustee and the creditor.” This makes sense because if the homeowner’s equity exceeds the value of the mortgage, the trustee can sell the property, pay off the mortgage, and use any surplus to pay down the debtor’s remaining creditors. But where, as in this case, the mortgage is underwater, there is no surplus for the trustee to use, but the mortgage lender still has the right to recover its interest in the property.
Accordingly, the 11th Circuit said that by filing for bankruptcy and surrendering their house to the trustee, the debtors were also required to “drop their opposition” to the lender’s foreclosure action.
A Florida Chapter 7 Bankruptcy Attorney Can Help
Even if bankruptcy will not stop the bank from foreclosing on your house, a Chapter 7 filing can buy you some time in negotiating with your mortgage lender and possibly avoiding foreclosure. If you need advice from an experienced Miami bankruptcy attorney on this or any related subject, contact the Law Office of Julia Kefalinos today.