Hi, my name is Bryan Penland, I’m one of the
attorneys with the Law Offices of James Flexer. I’m the managing attorney in our Columbia,
TN office. My practice primarily is focused on Chapter 7 and Chapter 13 consumer bankruptcy.
I’m here today to talk about an issue that comes up quite a bit with our clients, and
that is, “If I’m surrendering my home in bankruptcy, what happens next?” “What happens with the home?
What happens with the debt?” To answer this question, we need to start out by understanding
the way a mortgage loan works. If you own a piece of property, there are two different documents that establish ownership, and then if there’s a lien or a debt on the property,
there’s another document that establishes the debt. The first is the warranty deed,
or the deed that establishes who owns the property. The second is the deed of trust.
The deed of trust is what secures the mortgage note to the property. The deed of trust, at
least in the state of Tennessee, is recorded in the registered deeds office as well as
this warranty deed. So if you file bankruptcy, and let’s say you file Chapter 7, and you
want to just surrender your home, you want to receive a discharge of the mortgage loan.
When you file the bankruptcy, the mortgage company gets a notice you’re filing. They
have an opportunity to attend your meeting of creditors to ask you questions about the
mortgage loan. They have to file a proof of claim showing they have a valid lien against
the property. Once your case discharges, the note, or the deed or trust, is no longer owed
by you. That is a dischargeable debt. The issue that arises is that the lien, or the
warranty deed, does not change until the property is foreclosed upon. Now what this means is,
the property still remains in the deed owner’s name. Now a foreclosure, at least in the state
of Tennessee, is done through a non-judicial process of simply notifying someone of the
foreclosure sale date and then putting it up for auction on usually the courthouse steps
in the county you live in. And then a deed is transferred from the name of the party
who owned it to a trustee or a substitute trustee. Now when that happens, the property
is no longer in the original owner’s name. The problem is, with what’s been going on
in the mortgage industry lately, is that foreclosures are taking forever. And so we have clients
who call a lot and say, “I’m still getting property tax bills. I’m still getting HOA fee bills.” And this has become quite a conundrum with the bankruptcy courts, because technically
they’re still the owner and subject to being billed for property taxes. So it’s not an
easy fix, but what we decided to do in a lot of cases is to write letters to the mortgage
company requesting something like a deed in lieu of foreclosure, where you would simply deed the property back to the mortgage company to avoid the expense they would have to go
through to foreclose on the property. Now one thing I will tell is that can have tax
consequences. Our office does not provide tax advice, and we would encourage all of
our clients who might do that to contact their tax consultant before entering into a deed
in lieu of foreclosure. There is also something called cash for keys that a lot of mortgage
companies are doing, where you might deed the property back to them, and they may do
that and pay you some money for doing it. Again, that could have tax consequences, both
as income, but also in the sense that you are executing a deed in lieu of foreclosure.
Again, I would ask my tax consultant, and we advise our clients to do so when they might
be considering doing one of those options. To recap, in a Chapter 7 if you’re seeking
to surrender your home and receive a discharge, you can discharge the debt in the Chapter
7, but the deed ownership of the property does not change just because you filed bankruptcy.
So more steps have to be taken. If the mortgage company won’t foreclose, you might have to take those extra steps with the help of your attorney to get your name off of that property.
If you want more information about Chapter 7 bankruptcy or Chapter 13 bankruptcy, contact
one of our offices. We have offices in Nashville, Columbia, and Murfreesboro. If you want information
about Chapter 7 in the form of a booklet, you can log onto our website at www.flexerlaw.com.
Thank you for listening, and we’ll see you in future videos.