Wednesday, March 09, 2016

How To Use Chapter 13 Bankruptcy To Unload Title To Dilapidated, Soon-To-Be-Abandoned, Financially Underwater House Onto Reluctant-To-Foreclose Bankster; Move Cuts Off Homeowner's Continuing Liability For Property Expenses (ie. Civil/Criminal Liability For Code Enforcement Violations, etc.)

From a recent post on Bankruptcy-RealEstate-Insights:
  • The debtors proposed a chapter 13 plan providing that certain real property was to be surrendered to the mortgagees and title to the property was to vest in the first mortgagee over its objection. The bankruptcy court confirmed the plan.

    After the house where the debtors were living suffered damage in Superstorm Sandy, they bought a second house – which is where they were living when they filed a chapter 13 bankruptcy.

    Their bankruptcy schedules showed the old house with a value of ~$255,000, subject to a first mortgage with a balance of the ~$387,000 and a second mortgage with a balance of ~$30,000. The first mortgagee filed a proof of claim asserting that it was owed ~$440,000. The first mortgagee also filed a motion for relief from the automatic stay to permit it to continue a foreclosure.

    Under the plan the debtors proposed to retain their current home and to surrender their former home to the mortgagees “in full satisfaction of the secured portion of the mortgage owed pursuant to 11 U.S.C. Section 1325 and 506.” It also provided that title to the old property would be vested in the first mortgagee: “‘[t]his vesting shall not merge or otherwise affect the extent, validity, or priority of any liens on the property’; and ‘the confirmation order shall constitute a deed of conveyance of the property when recorded with the county clerk’s land records.'” Further, under the plan all claims secured by the old property would be deemed paid by surrender of the property, provided that the mortgagees had 30 days after confirmation of the plan to file unsecured claims for any deficiencies.

    Although the first mortgagee did not oppose surrender, it objected to being forced to take title to the property.
    A debtor has a right to surrender property to a lender over its objection, and the court viewed vesting of title to the surrendered property in the lender as entirely consistent. Adding vesting to surrender allows the lender to dispose of the property without waiting to complete foreclosure. Consequently the court confirmed the plan over the first mortgagee’s objection.

    Surrender is one of those concepts that is often misunderstood. Debtors are surprised to find that they have continuing liability for property expenses after surrender, with no way to force a mortgagee to foreclose in order to cut off liability.(1)

    Combining surrender with vesting title produces a result that is more aligned with debtors’ expectations – although, on the other hand, it is almost certainly the case that lenders expect to control their own destiny, which probably does not include being forced to take title to “dilapidated property.”
Source: Chapter 13 Plan: How to Really Get Rid of Unwanted Property.

For the court ruling, see In re Zair, 535 B.R. 15 (Bankr. E.D.N.Y. 2015).
(1) See Lender Abandons Foreclosure Action, Leaving Unwitting Property Owner Holding The Bag On Code Enforcement Violations & Facing Criminal Charges for an example of one homeowner who surrendered two rental properties in bankruptcy, only to be eventually slapped with three arrest warrants for not maintaining them after the foreclosing bank abandoned its foreclosure action, leaving the houses in legal limbo.

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