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What takes place when homeowners surrender their homes during bankruptcy?

Surrendering a home during bankruptcy is an option for overburdened debtors

In most personal bankruptcy cases, people are allowed to keep their homes in spite of their financial troubles. Filing in U.S. Bankruptcy Court often eliminates enough debt for homeowners to maintain their mortgages and catch up on delinquent payments.

During Chapter 7, in which non-exempt assets are sold to pay debts, homes are usually covered by an exemption and not surrendered by the owner. In Chapter 13, homes are protected for several years while the debtor pays creditors in a court-ordered installment plan.

However, when homeowners are significantly behind in mortgage payments, but a foreclosure has yet to occur, they have the option of surrendering their homes to the lender.

"Ideally it is only best to keep your home if you are current [in the mortgage] and you know that you will be able to continue to make payments on the residence as well as any other payments associated with the home," according to Shmucher Law in Florida.

Surrendering a home means the homeowner no longer has to pay the balance owed on the mortgage. When people take this step, they should list separate payments for property taxes, association fees or home insurance in their bankruptcy petition so they will not be held responsible for them.

Exceptions to the rule

There are circumstances in which legal experts tell debtors to keep paying home insurance and other financial obligations after they surrender their homes.

"Surrendering your home does not cause your mortgage company to immediately own it. In fact, many people continue to live in their homes after surrendering them in bankruptcy," states California attorney Jason Schrader. "At a minimum, be sure that you have liability insurance should you damage the house or should someone be injured on the property."

Homeowner association dues should be paid by people until the mortgage company transfers the deed out of their names. Otherwise, the association is able to sue homeowners for unpaid fees, for which they would be liable.

It's also important to know the difference between a true foreclosure and a technical one that takes place after a home is surrendered. Debtors whose homes have been foreclosed upon usually have to pay the difference between the mortgage balance and the sale price when the home is sold at auction. However, in a technical foreclosure, the lender is taking this action only to clear the property title from the owner's name so that it may be sold to another party.

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