Underwater Homes

The term “underwater home” means that your house is worth less than what you owe on the mortgage.   In that case, you could decide to surrender the property as part of a Chapter 7 or 13 bankruptcy proceeding.  Doing this absolves you of any personal liability on the mortgage note, but the mortgage itself remains a lien on your home.

In my experience, there are three main reasons to own a home: (1) having a roof over your head, (2) the mortgage interest and property taxes as income tax deductions, and  (3) building equity in your house as an investment.  When your home is underwater, the equity rationale no longer exists.

If you are behind on your mortgage but wish to keep your home, Chapter 13 is the best route.
That allows you to propose a plan for repayment of the mortgage arrears over a period of three to five years.  You would also be obligated to continue making the normal monthly mortgage payment after the bankruptcy is filed.

If you decide that you want to let the house go and walk away from it, that can be done in a Chapter 7 or 13 by offering to surrender the property.  In most cases, Chapter 7 is the better choice for accomplishing that and would wipe out your debt to your mortgage lender.
However, note that your mortgage lender could continue with a foreclosure after the Chapter 7 was concluded or if they receive permission from your bankruptcy Judge. At the end of the foreclosure process, the mortgage company could obtain the property at a sheriff’s sale and sell it to a third party. However, in no case would you be liable for a deficiency to the lender because your indebtedness is discharged in the bankruptcy.

Realize that the deed is in the mortgage lender’s name or some third party’s name, it is still in your name and you would remain responsible to the municipality for municipal ordinances that might exist (not letting your grass get above a certain height or repairing dangerous conditions to the property, etc.). You would also be responsible for association fees accruing after the bankruptcy filing date.  Also, you should maintain liability insurance on the property until the deed is transferred to someone else., in case someone is injured on your property.

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Charles D. Whelan III has been committed to excellence for over 30 years. With offices located centrally in New Jersey, he is able to provide businesses and individuals with excellent legal services.

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