Information on credit effect of surrendering a home - The Bills.com Blog
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Information on credit effect of surrendering a home
Question: I am about to file for bankruptcy (chapter 7) I own a home with another person and right now our house is worth less than we owe. Because there is no equity the Bankruptcy Trustee will not take the house and liquidate it. I have an imminent foreclosure date pending. I don't want to keep the house and neither does the co-owner, we want out. Do I need tocontact the lender and surrender the property to them? If I do this will I then be cleared of the debt owed because of the bankruptcy protection? And after surrender of the house can the mortgage company come after my co-debtor for money even though they can't touch me anymore? And will the surrender or deed in lieu show up on the co-debtor's credit report as well?
Answer: When a home is foreclosed upon, the property is generally sold at auction, and the proceeds of the sale are applied to the balance of the mortgage loan. Any balance remaining on the mortgage after this process is referred to as a deficiency balance, and could be a substantial amount depending on the current balance of the mortgage and the value of the home. The answer to your question of whether or not the mortgage lender will be able to pursue the co-debtor for payment of the deficiency balance greatly depends on the state you live in, as some states allow mortgage lenders to collect on deficiency balances, while other states do not. I highly encourage you to speak with a qualified real-estate attorney before you make any decisions regarding the voluntary surrender of your home so that you will know the potential consequences based on your State's laws.
Rather than allowing the home to go into foreclosure or surrendering the property to the lien holder, you may want to consider selling the home; selling the property should cause you fewer
problems than allowing the property to go into foreclosure. If you owe more on the home than the property is worth, you may want to consider a short-sale, in which your mortgage company would accept less than the full balance of the mortgage to settle the debt. You would then sell the home and pay the mortgage company whatever you received, and the mortgage company would forgive the remaining balance. If you are interested in a short sale, the first step is to contact your mortgage lender to find out if this is an option. You can only proceed with a short sale with the consent of the mortgage holder, so it is imperative that you communicate with the lender. For more information about short sales, you can visit http://www.ehow.com/how_8132_short-sale.html. Generally speaking, a short sale is a much less painful process than allowing the property to fall into foreclosure.
If your lender will not allow you to conduct a short sale, you may also want to consider asking the lender about a 'deed in lieu of foreclosure' agreement, which involves surrendering the home to the lender to prevent foreclosure. However, before you proceed with a 'deed in lieu', you should consult with an attorney, because as mentioned previously, the mortgage lender may come after the co-owner for the deficiency balance, even if you are protected by your bankruptcy filing.
It
is likely that any foreclosure action or 'deed in lieu' agreement will appear on both your credit reports and those of the co-owner, as you are both liable for the debt. Unfortunately, there is little you can do to prevent this negative information from being reported. A foreclosure is seen as a serious black mark on your credit report, and will likely cause significant damage to your credit rating. However, with time and effort, you and the co-owner should be able to rebuild your credit ratings. For additional information on credit and credit scoring, I encourage you to visit the Bills.com credit help page at http://www.bills.com/credit/. In addition, you should review the foreclosure section of Bills.com at http://www.bills.com/foreclosure/ for information about foreclosure and suggestions on how to prevent it.
Again, I strongly encourage you to speak with a qualified attorney before making any decisions regarding your home, as your state's laws could significantly affect how you decide to resolve this problem. I wish you the best of luck in preventing this foreclosure, or at least at mitigating its impact on you and the co-owner of the property. I hope that the information I have provided helps you Find. Learn. Save.
Best,
Bill
www.bills.com
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1. Posted by Jean Wild on Tuesday 19th February 2008 09:57
I am unable to sell my semi-detached bungalow even though I have reduced the price from £215.000 to £185.000. My husband had an affair and i took over the mortgage when I had a good job however things changed and I am left with the mortgage of £630 per months, house insurance, policies, utility bills, council tax and this adds up to £1150 per month out-going. My take home pay is £850. My house has been on the market for 4 mths and i am considering selling it to a House Buyer but they are sharks. If I was to voluntarily surrender my home to the lender and let them deal with it would it be a big default on a creditor as if so I could loose my job. I do not know what I can do as cannot afford to go on like this and I am in arrears now of £1224 with my lender. Do you think i would be better surrendering my property. If the lender sells it eventually will I get some money at all? Please advise as I am at my wits end.
2. Posted by Nithin on Wednesday 20th February 2008 15:40
You will need to speak to your lender about surrendering your home. As you have stated your amounts in pounds, I don’t know that the advice that I give will hold good there because Bills.com caters to financial issues in the United States. I do know that if your home sells for less than what you owe, the lender can still hold you responsible for the balance. As I said, I am not sure about the laws in the UK, so you should speak to your lender to clarify.
3. Posted by Lilian on Saturday 8th March 2008 10:13
If it is the case that the co-owner (name is on title) but not a co-borrower (name is not on the loan), will the lender go after this co-owner regarding the deficiency balance? Also, will this affect the credit report of this co-owner?
4. Posted by njawali on Monday 10th March 2008 09:01
If you are on the title but not on the mortgage note, then you are not legally responsible for paying anything but the taxes. Now, depending on your marital status and other factors, a judge can have grounds to say you are liable for more...but as far as the BANK is concerned, it's the other party.
5. Posted by Marcia Gimla on Wednesday 16th April 2008 19:17
My house is being forclosed on, I filed chapter 7 and it was complete in December. Now the mortgage company is calling me. Is this legal. This mortgage company did the secondary mortgage. Do I just tell them not to call? I am also moving out of my house in a few weeks, should I call the mortgage companies, primary and secondary and advise them of this? I want to be clear, since my house was included in the chapter 7, the mortgage companies can not come back to me for the difference should the sheriff sale not pay off the entire loan, is that correct?
6. Posted by Bill on Thursday 17th April 2008 11:09
You need to check if the second mortgage was also included in the bankruptcy ruling, which will list out all the debts that are going to be dismissed. If you can confirm that, then you can send a cease communication notice to the creditors that are calling you to stop the collection calls. If the proceeds of the foreclosure sale are first applied to your primary mortgage. Then, any funds left over will be distributed to the secondary and tertiary lien holders. If the proceeds of the sale are not enough to cover the second mortgage and if for some reason the second mortgage was not included in your bankruptcy filing, then the debt would convert to an unsecured deficiency balance and the creditor could potentially still follow up with their collection efforts.