Some Chapter 7 debtors are current on their mortgage obligations at the time of the bankruptcy filing, and there is no equity (value above mortgages and liens on the property) that can be reached by creditors. In this situation, the debtors may keep, and continue to own, the property throughout the Chapter 7 case and after the case it is closed – so long as they continue to uphold their end of the mortgage agreement.
However, many Chapter 7 debtors are in default on their mortgage obligations at the time of the bankruptcy filing. Some of these people wish to surrender (give up) the property as part of the bankruptcy, and discharge the debt.
Short sales and foreclosures: a good idea for your situation?
We often counsel clients on how a short sale, foreclosure or mortgage modification factors into their bankruptcy case. In both of these situations, we attempt to prevent clients from taking action that wipes out the “fresh start” that bankruptcy offers.
Short sales. Some clients have a mistaken belief that having a foreclosure will in some way damage their ability to obtain credit in the future, even though they are already in bankruptcy. As a result, they spend a great deal of time and energy in attempting to arrange a short sale. Unfortunately, this can lead to substantial expense, and, in some cases, a large amount of post-petition debt that may not be discharged in the bankruptcy case. Unless there is an extremely good reason for attempting a post-petition short sale, you are strongly advised to walk away from the property and avoid getting involved in any short sale attempt.
As to the expense, it is necessary for the debtor to obtain in the bankruptcy case an order for an abandonment of the property in order to do a short sale, if the bankruptcy case has not been closed. This is an expensive procedure that requires notice to all creditors and a court hearing. This cost is not included in the fee that you paid to file the bankruptcy case. Therefore, should you wish to obtain an order of abandonment, you will be charged for expenses that we incur and services that we render, the latter at our firm’s hourly rates for attorneys and paralegals. You will also be required to deposit with us an advance fee to cover these costs, which will likely approach the amount that you paid to file the bankruptcy case.
You filed a bankruptcy case to obtain a fresh start; if you incur post-petition liability, then your fresh start has been thrown away by attempting to do something that is unnecessary.
Foreclosures. The second involves clients who wish to in some way assist their lender that is attempting to foreclose, perhaps to speed the process up for the lender, help the lender save expenses, or in some other way “do the right thing” to help the lender.
From the lender’s point of view, foreclosure is neither difficult nor lengthy. On average, it takes about 75 days to complete a foreclosure. However, if you ask for our advice or assistance in trying to speed up the process for your lender, then please realize that such work is not included in your bankruptcy fee. You should expect to be charged our firm’s hourly rates for attorneys and paralegals, and to be required to deposit with us an advance fee to cover our work, which will likely approach the amount that you paid to file the bankruptcy case. This makes no sense for you. You have a fresh start and should simply let the foreclosure process run its course.
This post is an attempt to explain a very complex legal matter. It is not legal advice. If you find yourself in financial hardship, only a consultation with a qualified bankruptcy attorney is reliable advice. The advice you get may be priceless to your financial future and emotional well being.