Information on credit effect of surrendering a home
Will a surrender or deed in lieu show up on the co-debtor's credit report as well?
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 to contact 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?/
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, 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, attempting to get the mortgage company to 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. Generally speaking, a short sale is a much less painful process than allowing the property to fall into foreclosure. It gives you more control over the price the home sells for, which can be extremely important if you end up responsible for any remaining deficiency balance.
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.
You should expect 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 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.
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.