Submitted on Friday, June 14, 2019
We received the following question from a user:
I fell behind on my mortgage payments due to unforeseen family circumstances. The mortgage company has been horrible. The house needs a lot of work. I can’t make the repairs and make the repayment they want me to make to catch up monthly. The mortgage company told me there is no special arrangement that I qualify for in order to either recast my loan or catch up on the payments. Can I file a Chapter 7 and walk away from this debt?
Here's what Jeff Jenkins had to say:
The short answer is that if you qualify for a Chapter 7, you can do one and erase your liability on the mortgage note. Let me explain that in a little more detail.
First, to see whether or not you qualify for a Chapter 7, we need to look at your income (you cannot have more than the average annual income for a family your size in New Jersey) and file a Chapter 7 (if you are over that amount, it would have to be a Chapter 13). The other important thing to always consider when we think about filing a Chapter 7 whether you have any property above the amounts the Bankruptcy Code would allow you to have. The Bankruptcy Code provides that if you file a bankruptcy you are allowed to “shield” a certain amount of equity in types of property you might own (so much for equity in a home or equity in furniture, or clothing, or jewelry, or a car). There is even a miscellaneous exemption you can use for any property, like bank accounts. Assuming a Chapter 7 can be filed based on the foregoing, this is how the Chapter 7 would work with your mortgage loan and walking away from your home.
When you file a Chapter 7, the basic concept is that you are going to erase erasable debts. The Bankruptcy Code indicates that certain debts are dischargeable in a Chapter 7 (you can get rid of them) and other debts will survive the bankruptcy and will not be discharged. Just as we did with your income and whether you have any non-exempt equity in property, we would also look at the types of debt you have to make sure that they are dischargeable in a Chapter 7. Some things might not be dischargeable in a Chapter 7 but would be in a Chapter 13, which would be a reason for doing a Chapter 13. Let’s assume that there is no problem with your income or equity you have in assets or the types of debt you have being dischargeable.
When you do a Chapter 7, as I previously mentioned, all dischargeable debts are eliminated when you get a discharge at the end of your bankruptcy proceeding. As far as your mortgage is concerned, when you got the mortgage, you signed two main documents (you sign a variety of documents, but there were two that were the most important), that would be the mortgage note (the IOU saying that you owe the mortgage company a certain amount of money at a certain amount of interest amortized over a certain amount of time) and a mortgage (the mortgage gives the mortgage company a lien on your house, it makes your house their collateral for you repaying the mortgage note). Just as other debts are discharged in a Chapter 7, your liability on the mortgage note would also be discharged. The mortgage itself is not eliminated, so the mortgage company would retain its lien on your property. So, if you did not make your mortgage payments, the mortgage company could foreclose on your property. If they did that and got the property at sheriff’s sale and sold it to a third party and received less than the amount that you owed them according to the mortgage note, they could never sue you for any deficiency in this regard, because your liability on the note is eliminated by your discharge.
If you do physically walk away from your home prior to the time the mortgage company concludes a foreclosure, it is still your property. Therefore, you are still responsible for liability damage regarding the property (for example, if someone slips and falls on your property or a tree falls on them, etc.) you would want to, therefore, maintain at least liability insurance for you so that you have protection against any potential lawsuit for personal injury on your property. Whether you maintain fire and extended coverage insurance to protect the home itself, basically, doesn’t make any difference. Fundamentally, this is the mortgage company’s problem and responsibility if they want to keep their asset intact/insured so that if there was damage to your property, the mortgage company would be able to repair it with the insurance they might keep on the property.
If you do walk away from your property, before the sheriff would give the deed (at the end of a foreclosure process) to the successful bidder at the sheriff’s sale, you are still obligated to observe local ordinances regarding your property. For example, there might be an ordinance regarding how high your grass can grow or requiring you to shovel snow on the sidewalks in the winter, etc. As long as the property is in your name, you need to continue to observe these municipal ordinances regarding your property. I hope that is a comprehensive answer to your question.