Surrendering Real Estate Other than Your Home in Bankruptcy
Chapter 7 writes off your mortgage debt, many other debts against the property, and potentially pays your “priority” debts as well.
If you own real estate that is NOT your home, and you’re considering bankruptcy, there’s a good chance that real estate is part of what’s dragging you down financially.
Maybe you made an investment that turned sour. Or the property is tied in somehow with a business that did not succeed. Or you may even have gotten the real estate by inheritance or divorce but it’s more of a burden than a benefit because of the debts against it.
How can filing Chapter 7 “straight bankruptcy” help with this?
Chapter 7 to Write Off Real Estate Mortgage Debt
In many states if you surrender your home to your mortgage lender, that lender can no longer pursue you for any liabilities related to that mortgage. That’s usually not the case with mortgages on business or investment property. You can often end up owing much of the mortgage debt after surrendering such property.
Chapter 7 to Write Off Other Real Estate-Related Debt
The debts can include not just the mortgage loan itself but various other potential obligations with liens against the property, for
- real property taxes
- commercial association dues and assessments
- your business’ income and sales taxes
- unpaid utility bills
- city and other local assessments and fines
- building contractor’s repairs
- your personal unpaid federal and state personal income taxes
- child and spousal support obligations
- divorce property division
Some of these obligations tend to stay with the property and would be paid by your mortgage lender after taking possession of and selling the property. Real estate taxes are an example.
Some of these obligations do not get written off in a Chapter 7 bankruptcy. Child and spousal support and recent income taxes are examples.
Most of the rest of the obligations are ones that you would be personally liable for, would not be paid by your mortgage lender, and could be “discharged”—legally written off in bankruptcy. Examples are unpaid utility charges, contractor repairs, and older personal income taxes. A Chapter 7 bankruptcy case gets rid of these obligations—along with all or most of your other personal and business debts—and usually does so within a matter of just 3 or 4 months after the case is filed.
So, regardless whether you have equity in the real estate or not, consider a Chapter 7 bankruptcy to surrender that property to your primary mortgage holder, discharge your debt to that mortgage holder, as well as most or all of your other debts against the property.
Chapter 7 to Pay Special Debts
In addition, if you DO have equity in your real estate and owe certain special kinds of debts, you can file a Chapter 7 case and have those special debts be paid in full or in part out of that real estate equity.
This can happen because under bankruptcy law certain kinds of debts are paid in full by the bankruptcy trustee before other debts receive anything. These “priority” debts often also happen to be debts that are not discharged in bankruptcy, so you would have to pay them yourself after your Chapter 7 case was finished. Examples include more recent personal income taxes, and child and spousal support arrearage. So you of course prefer that these “priority” debts be paid first out of the proceeds of your real estate, instead of other debts that would be discharged and you wouldn’t have to pay them after your bankruptcy case was done.
As a result, instead of surrendering your real estate with equity to your mortgage lender, you surrender it to the bankruptcy trustee. The trustee then sells it, the creditors with liens on the property are paid through escrow at the closing of the sale, and the trustee pays the remaining sale proceeds first to your “priority” debts. You end up either owing nothing on those “priority” debts after your bankruptcy is done, or at least less than you would have otherwise.