A recent bankruptcy court decision out of Hawaii offers a new perspective to a conundrum often faced by debtors. The problem is a classic Catch 22 situation: the debtor surrenders real property in bankruptcy and discharges personal liability for the debt; however, he remains the owner of the property until the title is legally transferred. Consequently, the debtor is still liable for home owner association fees, taxes, and/or property insurance after the bankruptcy discharge – even if he no longer lives in the house!
Bankruptcy courts across the nation have said that the Bankruptcy Code does not require a lender to foreclose on property after it has been surrendered by the debtor. An Indiana bankruptcy court held that a homeowner cannot force the lender to take title to real estate by unilaterally executing a quit claim deed. See Phillips v. City of South Bend, 2007 Bankr. LEXIS 1503 (N.D. Ind. 2007). So what can be done?
One clever approach may offer some hope to this problem. In the Chapter 13 case of In re Rosa, No. 13-00630 (Bky. Hawaii July 8, 2013), a Hawaii bankruptcy court confirmed (approved) a debtor’s Chapter 13 plan over the trustee’s objection. The plan included a provision to convey real property back to the first mortgage holder. Specifically, the plan provided that title to the real estate “shall vest in City National Bank/OCWEN Loan Service upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Bureau of Conveyances.”
The Chapter 13 trustee objected to the debtor’s plan and argued that the surrender of the debtor’s home in bankruptcy did not transfer ownership. The bankruptcy court disagreed and found (1) that the debtor’s Chapter 13 plan plainly stated that ownership would transfer to the lender upon confirmation; (2) that the order confirming the plan would be recorded like any other deed of conveyance; and (3) the lender was served with the plan and had not objected to this provision.
It is too early to know whether this approach is a long-term fix for this serious consumer bankruptcy problem. If you need to surrender real estate through bankruptcy, speak with an experienced bankruptcy attorney and explore your options. Your attorney can explain the practices of your local court and offer solutions to your financial problems.