If you no longer wish to keep your house, you can surrender it (give it back) in your Chapter 7 bankruptcy. Read on to learn more about what happens when you surrender your house in Chapter 7 and how it can benefit you.
(To learn how Chapter 7 works, see our Chapter 7 Bankruptcy area.)
In Chapter 7 bankruptcy, your mortgage is classified as a secured debt because your lender typically has a lien on your house. If you don’t pay your mortgage, it can enforce the lien by foreclosing on the house.
When you file for Chapter 7, you must indicate whether you intend to keep or surrender each property that secures a debt, including your house (if you have a mortgage or other lien on the property). When you surrender your house, you are essentially walking away and giving it back to your lender.
One of the forms you are required to complete in your bankruptcy papers is the “statement of intention.” If you want to surrender your house, you simply check the box indicating your decision to surrender on the statement of intention. (For more details, see Completing the Statement of Intention.)
Below, we discuss some of the most common reasons you may wish to surrender your house in Chapter 7 bankruptcy.
For many people, this is the primary reason they choose to surrender their house. If you can’t afford your mortgage, then you usually can’t afford to keep your house.
If your mortgage balance is substantially greater than the value of your house, it may not be worth keeping. Many debtors decide that they can move to a comparable place and pay less. If you are upside down on your house, Chapter 7 provides a simple way to walk away from it.
People have both personal and financial reasons for wanting to surrender their house. However, if you have equity in the house, consider selling it yourself to realize the maximum amount of profit instead of surrendering it. Otherwise, the Chapter 7 trustee may sell your house and pay your creditors with the proceeds (if you can’t exempt all of the equity) or your lender may sell the house at foreclosure for less than what you could have sold it for.
If you are upside down on your house, chances are your lender will not be able to sell it for enough money to cover the entire balance of its loan. If you also had a second or third mortgage, those may not even receive anything from the proceeds. When the foreclosure sale doesn’t pay off the entire balance of your mortgage, the remaining amount is called a deficiency.
The main benefit of surrendering your house in Chapter 7 bankruptcy is that your discharge eliminates your liability on a deficiency. In certain states, your mortgage lender can come after you personally to collect a deficiency balance. This means that you may be facing a lawsuit even after the lender foreclosed on your house. Your bankruptcy discharge wipes out your obligation to pay back a mortgage deficiency. As a result, you can walk away from the house free of any further liability after surrendering it in Chapter 7.
(For more information on what happens to your house in bankruptcy, see Your Home in Chapter 7 Bankruptcy).