In the past, our firm, Acclaim Legal Services, mainly filed Chapter 13 bankruptcies to stop foreclosure sales and give borrowers the opportunity to cure outstanding mortgage arrearages. More and more, we are seeing clients choosing to surrender their property under the Chapter 13 plan due to severely declined house values. Chapter 7 may seem like the obvious choice when surrender of property is the goal, however, in many circumstances an individual may not be eligible for Chapter 7 (e.g., too much income, prior Ch. 7 within 8 years) or their overall circumstances may dictate that a Chapter 13 is more appropriate (e.g., non-exempt property exists and client seeks to avoid liquidation; substantial priority debt exists that the debtor needs an opportunity to pay as it would be non-dischargeable in Ch. 7; debtor seeks to reorganize other secured debts such as a vehicle while surrendering his or her home).
The majority of states are “recourse” jurisdictions which allow mortgage companies to pursue borrowers for deficiencies that remain following a foreclosure sale. Previously, if homeowners had just a first mortgage, they generally could walk away without further obligation or indebtedness to the mortgage holder. This was primarily due to the mortgagee submitting a “full debt bid” at the foreclosure sale thus negating the possibility of a deficiency on the note. The tide has now turned and we are seeing banks begin to submit less than full debt bids and subsequently pursue borrowers for loan deficiencies after the foreclosure sale. A recent Wall Street Journal article, “House is Gone but Debt Lives On,” detailed the national trend: Visit our website for more information.
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