Walking away from a house: not a sure thing?

It’s no surprise that with the economy in the dumper and the housing market at a standstill, more and more people are trying to use bankruptcy as a means to get rid of their house, rather than trying to save it.

From a green-eyeshade point of view, bailing out of a home that is seriously underwater is often a smart thing to do, as California bankruptcy attorney Cathy Moran likes to point out.

But what would happen if the lender refused to take the property back?

Now this happens only rarely, if at all, but it raises a sticky point about the current state of the law: there may not be a way to force a lien holder to take property if they don’t want it. Even under the Bankruptcy Code.

A married couple in Massachusetts got a taste of how this works in a bankruptcy case recently decided by Judge Boroff in Worcester. As part of their Chapter 13 case, the debtors in the Cormier case filed a motion with the judge to force their home mortgage lender, American Home Mortgage Service, Inc., to “hurry up” and foreclose and take possession of the property; the Cormiers were incurring insurance and other ongoing expenses while the case was in progress.

No dice, said the judge, in a long detailed opinion that delves into the fine points of what ownership truly means under both Massachusetts and federal laws. The judge decided that since the mortgage company had already filed with the court a “motion for relief” — the first step in foreclosing on someone who has filed a bankruptcy case — the motion would be allowed, and the debtors would have to see if the house went into foreclosure shortly. if not, perhaps they can come back with an updated argument, but otherwise, the judge was content to let the process play out slowly.

The judge also denied the debtor’s attempt to deduct their insurance costs from their Chapter 13 payments as “administrative expenses,” a category typically used for legal and other professional fees.

The bottom line: while it would be unusual to see a secured creditor refuse to actually take their security back when it is offered to them, it isn’t easy to hurry the procedure up if the creditor appears to be dragging their feet.

Walking away from a house may not be so easy after all!


By Doug Beaton

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