This article is written by Peters and Associates.
Many clients come into our office and say they got rid of their underwater house through a prior bankruptcy, and many times, they are mistaken. While it is true you can “surrender” your home in a bankruptcy, that doesn’t necessarily mean that surrender will get the house out of your name. To understand why the bankruptcy by itself won’t relinquish your interest in your real property, you first must understand how a mortgage works.
A home mortgage is made up of two legal instruments: a note and a deed of trust. You can think of a note as an IOU or a personal promise to repay a mortgage. In contrast, a deed of trust is a lien on your property that allows your mortgage lender to foreclose on the property if you don’t make timely payments on the note. A bankruptcy, whether it is a Chapter 7 or 13, relieves you only of personal responsibility for repaying the note. It does not permanently affect the deed of trust. What that means is that even after your bankruptcy is discharged, you still own your home. To walk away from your underwater house, you must take another step to get off title.
To get off the title of your underwater home you must complete either a short sale or a deed-in-lieu of foreclosure, or your lender must complete a foreclosure. If one of those is not completed and you just walk away from your home, you may face additional problems in the future. For example, if someone gets hurt in your abandoned home or on the property, whether they are squatters or neighborhood kids, you may be found liable for their injuries.
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