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Property Surrender During a Bankruptcy Filing - The Bills.com Blog
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Property Surrender During a Bankruptcy Filing
Monday, Oct 6, 2008
Question: My wife and I are filing for Chapter 7 Bankruptcy in Massachusetts (we had our 341 meeting on 9/17/08). During the process we plan on surrendering the vehicle I owe money on, and our home. My question is involving the home, will surrendering the home in bankruptcy also put a foreclosure on my credit after the discharge? Thank you!
Answer: Given the depressed state of the current housing market in the United States, many homeowners are finding themselves making the same difficult choices as you and your wife. For the many Americans who now owe significantly more on their homes than the properties are worth, one possible way to free themselves from the financial quagmire is by filing for bankruptcy protection in federal court. Depending on the type of bankruptcy your attorney recommends, a bankruptcy case could completely wipe out many of your debts. For example, a Chapter 7 bankruptcy may discharge all unsecured debts, as well as many other types of debts, including any balance remaining on your mortgage after your lender sells the home (called a deficiency balance). Since you and your wife are no longer able to afford your home, and since you possibly owe more on the property than it is worth, allowing the bank to foreclose on the property and allowing your bankruptcy to discharge any deficiency balance may be a wise choice. If you have not already done so, I strongly recommend that you consult with a bankruptcy attorney in your area as soon as possible to determine if bankruptcy is a viable option to help resolve your financial woes, and to discuss the non-bankruptcy alternatives available to consumers who are struggling to meet their monthly obligations. If you would like to learn more about bankruptcy and the alternatives, I invite you to visit the Bills.com bankruptcy resources page at http://www.bills.com/bankruptcy/.Any time a mortgage lender is forced to take a home due to the homeowner’s inability to pay, be it through a conventional foreclosure, a deed-in-lieu of foreclosure agreement, or through bankruptcy, the fact that the mortgage was foreclosed will appear on the borrower’s credit report. When a property is surrendered in bankruptcy, it is basically the same as a deed-in-lieu of foreclosure agreement; essentially the borrower turns over the deed to the property without the lender actually being required to file foreclosure
proceedings against the borrower in court. The benefit to surrendering the property in this manner is that it avoids legal proceedings, which are a public record, and thus prevents a public record listing for the foreclosure appearing on your credit report. Keep in mind that some states, such as California, mortgages are given under a system called “deed of trust” which allows a lender to foreclose without court proceedings, so if you live in one of those states, whether the foreclosure is voluntary or not will make little difference in how it appears on your credit report. Generally speaking, a deed-in-lieu agreement is something that a borrower would need to negotiate with his mortgage lender, which can be a difficult process in certain cases. However, since you are in bankruptcy, the courts can force the lender to take the property, allowing you to discharge any deficiency balance as part of your bankruptcy. I encourage you to speak with your attorney about what his past clients have seen with regard to their credit reports after surrendering property in bankruptcy to help you better weigh the consequences of your bankruptcy filing.
Even though surrendering this property in bankruptcy may appear as a foreclosure on your credit report, you may have no choice but to proceed with your current plan, especially if you cannot find a buyer willing to purchase the property. The fact that you are filing for bankruptcy protection will likely have a stronger negative impact on your credit rating than the fact that you are surrendering your home and vehicle; even if you managed somehow to keep the property, your credit score would almost certainly drop significantly due to the bankruptcy alone. Once your bankruptcy is complete and you have rid yourself of these burdensome obligations, you can start working to rebuild your credit rating. In order to rebuild your credit score after a bankruptcy filing, you will need to start establishing
Even though surrendering this property in bankruptcy may appear as a foreclosure on your credit report, you may have no choice but to proceed with your current plan, especially if you cannot find a buyer willing to purchase the property. The fact that you are filing for bankruptcy protection will likely have a stronger negative impact on your credit rating than the fact that you are surrendering your home and vehicle; even if you managed somehow to keep the property, your credit score would almost certainly drop significantly due to the bankruptcy alone. Once your bankruptcy is complete and you have rid yourself of these burdensome obligations, you can start working to rebuild your credit rating. In order to rebuild your credit score after a bankruptcy filing, you will need to start establishing
new credit accounts and making timely payment to build a positive payment history. Your payment history accounts for approximately 35% of your credit score, so creating a new payment record is essential to rebuilding your credit score after bankruptcy. Since many credit card companies will not extend credit to people who have recently filed bankruptcy, a good option to consider is a secured credit card. Secured credit cards require you to deposit cash in an account with the credit card bank and the credit line available on the card is equal to the amount of cash you have on deposit. While it may sound strange to use a secured credit card rather than just spending your own cash, these secured credit cards report timely payments to the credit bureaus each month and should help you reestablish your payment history. Also, small credit accounts, such as gas cards, can be a good option to build credit, but you should make sure that you pay off your balance each month to avoid finance charges and to prevent yourself from starting down the spiral of debt again.
The more time that passes, the less negative impact your bankruptcy filing will have on your credit score. However, to build a positive credit rating you will need to counterbalance the negative impact of the bankruptcy with positive listings on your credit reports as mentioned above. As time passes, the positive impact of your new accounts will become stronger while the negative impact of your bankruptcy should become weaker, thus allowing you to slowly rebuild your credit score. For more information about credit, credit reports, and credit scoring, I encourage you to visit the Bills.com credit resources page.
Hopefully, your bankruptcy filing will provide you with the fresh start you need. I wish you the best of luck in resolving the financial difficulties you are facing, and hope that the information I have provided helps you Find. Learn. Save.
Best,
Bill
www.bills.com/blog/
The more time that passes, the less negative impact your bankruptcy filing will have on your credit score. However, to build a positive credit rating you will need to counterbalance the negative impact of the bankruptcy with positive listings on your credit reports as mentioned above. As time passes, the positive impact of your new accounts will become stronger while the negative impact of your bankruptcy should become weaker, thus allowing you to slowly rebuild your credit score. For more information about credit, credit reports, and credit scoring, I encourage you to visit the Bills.com credit resources page.
Hopefully, your bankruptcy filing will provide you with the fresh start you need. I wish you the best of luck in resolving the financial difficulties you are facing, and hope that the information I have provided helps you Find. Learn. Save.
Best,
Bill
www.bills.com/blog/
Also, make sure to get a free financial health check-up with Bills IQ!
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