When you file for Chapter 7 Bankruptcy, and indicate on your bankruptcy schedules that you intend to surrender your real property and discharge the underlying mortgage debt, I often recommend to my clients that they stop paying the mortgage as soon as the decision to surrender is made. Upon discharge at the conclusion of the bankruptcy, the debtor’s ongoing contractual obligation to pay will be discharged by the Bankruptcy Court, meaning that the debtor no longer has to legally pay the mortgage. Of course, the bank now may move to foreclose on the property and re-take title to protect its secured interest in the now-discharged loan, but the lender will not incur any new legal liability to the bank. This applies even if months (or even years) pass between when the debtor filed his Chapter 7 case, and when the bank finally completes the foreclosure on the surrendered property.
You should pay special attention to situations where the property you are surrendering real property that is subject to an fee or assessment from a condominium association, homeowner’s association, or cooperative corporation. Under 11 U.S.C. § 523(a)(16), pre-petition fees and assessments are dischargeable in a debtor’s bankruptcy but all post-petition condo fees, association dues, or co-op charges are not dischargeable, “for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in [the property]. This means that you are legally obligated to pay these fees (but not the mortgage) for as long as you own the property – up to and until the lender formally takes title to the property in foreclosure. Given that some lenders can take months (or even years) to foreclose on a property surrendered in a Chapter 7, 11 U.S.C. § 523(a)(16) places a significant financial burden on owners of condos, homeowner’s association members, and co-op tenants. The Automatic Stay will provide some relief to the debtor during the pendency of the bankruptcy, and the association cannot take any action to collect the fees while your case is before the court. However, the monthly charges will continue to accrue. If you do not pay the fees, the association may commence legal proceedings or make other appropriate efforts to collect the debt.
If you own property that is subject to such a fee or assessment, be sure your bankruptcy attorney is aware of these obligations. While there is no way to discharge the post-petition fees or assessments, it is possible to minimize the impact of 11 U.S.C. § 523(a)(16). Options include:
1. If possible, wait to file your bankruptcy case until after the foreclosure auction has taken place, thereby ensuring all fees are pre-petition debt.
2. If you are no longer residing in the property, consider renting out the property, and use the rental income to pay the association dues.
3. Don’t pay. However, if the debtor lives in a jurisdiction where foreclosure is taking years, the debtor risks exposure to a lawsuit for personal liability. Nevertheless, once the foreclosure is complete, the foreclosing lender must cure the deficient fees and assessments in order to pass clear title to the new buyer. This option involves a great deal of uncertainty, and risk to the debtor, but may be the only option in some circumstances.
4. Consider a short sale. Since your mortgage deficiency will be discharged (or was already discharged), a short sale can significantly shorten the amount of time the property is in your name, and can expedite the transfer of title.