We call these Zombie homes. This is the home you move out of when you can no longer afford the payment or the home is in terrible disrepair. These homes typically have no equity–they are worth far less than what is owed on the mortgage–and it may not seem possible to sell the home. Real estate agents balk at listing the home for sale until repairs are made, and the homeowner may not be in a position to afford the expense. So, the home sits vacant, sometimes for years.
The problem with vacant homes is that you still own them. You are responsible for cutting the lawn and shoveling the snow. Home association dues continue to accrue even after filing bankruptcy. Home insurance should be maintained in case someone is injured on the property. In some neighborhoods thieves will cut out the plumbing, air conditioners and fixtures. Vandals may break windows or spray paint graffiti on the exterior. The city inspector may impose fines for failure to maintain the home and they may even issue criminal citations if the problems go uncorrected. Owning a vacant home is a serious burden.
Homeowners are often shocked when banks do not immediately begin foreclosure after they stop making mortgage payments. There are many reasons a bank may delay foreclosure. Sometimes they have lost the mortgage documents and they cannot legally start the process. Sometimes they are swamped with foreclosures and can only process so many at a time. In some cases they don’t want to foreclose because the home is condemned or damaged and is considered a liability to own. I’ve seen homes that have sat vacant for nearly a decade.
A new option to deal with this problem is to use a Chapter 13 Plan to transfer ownership of the property to the bank. That is exactly what one homeowner did in the Minnesota bankruptcy court recently. (See In Re Stewart, 2015 Bankr. LEXIS 2948; 536 B.R. 273.) The Chapter 13 Plan contained the following language:
Upon confirmation of this Chapter 13 plan, the Property shall vest in OneWest Bank, and the Confirmation Order shall constitute a deed of conveyance of the Property when recorded at the Registry of Deeds . . . . All secured claims secured by the Property will be paid by the surrender of the collateral real property and foreclosure of the security interest.”
Over an objection filed by the Trustee, the Minnesota court approved the plan and allowed the debtor to quitclaim the home to the bank.
Other cases support this new trend in bankruptcy courts as well. The bankruptcy court for the Eastern District of New York has recently ruled that debtors have the right to surrender and convey a home to the bank over the bank’s objection. In Re Zair, 235 B.R. 15 (2015).
The Zair case is significant and the court does an excellent job of explaining the Catch-22 situation debtors find themselves in when a bank refuses to foreclose:
If Debtors were not able to divest themselves of ownership of the Property, they would be left in limbo while HSBC decides whether and when to proceed on its foreclosure action, thus incurring the continued liabilities associated with the property ownership, such as accruing property taxes.”
Other courts have ruled that the bank must agree to the surrender. (See In re Rosa, 495 B.R. 522.) It seems like the better reading of the Code allows a home to be conveyed over the bank’s objection.
If you have a home that you wish to surrender and efforts to sell the home appear futile, consider using a Chapter 13 Plan to transfer ownership of the home to the bank.
Image courtesy of Flickr and Nicholas A. Tonelli