Many attorneys will advertise that it’s often possible for homeowners to keep their homes in bankruptcy. While that’s true, sometimes issues such as affordability or relocation will have you owing money on a house or condo that you no longer want. Are you stuck?
To walk away from the property in bankruptcy, you’ll “surrender” it to the lender. The process starts by stating your intent to surrender in your bankruptcy papers.
But that’s just the beginning. If you haven’t already received one, you’ll eventually be served with a foreclosure lawsuit that’s been filed in an Indiana circuit or superior court. This may seem strange, since preventing a lawsuit is usually one of the benefits of bankruptcy.
Let’s look at why home loans are different, and more importantly, why a post-bankruptcy foreclosure isn’t something to worry about.
Two Sides to Every Story
Under Indiana law, a home loan has two sides: the “note” and the “mortgage.” The note is your personal obligation to pay a debt to the bank. On the other hand, the mortgage is the lender’s lien on the house. The mortgage secures the note by allowing the bank to sell the property if there’s a payment default.
Although bankruptcy wipes out debts, most liens will survive. So even though the note gets discharged, the mortgage remains after the bankruptcy. To sell the property and complete the surrender process, the lender will enforce its mortgage lien rights by foreclosing.
Judicial Foreclosure Required in Indiana
Indiana is a “judicial foreclosure” state. That means all foreclosures here in Indianapolis must be done by filing a lawsuit and getting a judgment. In some other states, foreclosures can be done without going to court at all, but that’s not allowed here.
A foreclosure lawsuit will name you and any other owners as defendants. But if you’re surrendering the property through bankruptcy, the lawsuit will be carefully worded to make it clear the bank isn’t trying to take your money. Instead, the lender is merely using its mortgage lien to have the house sold at a sheriff’s sale.
Bankruptcy Prevents Deficiency Judgments
What happens if the sheriff’s sale doesn’t generate enough money to pay off the loan in full? Without a bankruptcy, Indiana law allows the bank to get a personal money judgment against you for the deficiency.
But bankruptcy is a game-changer. Since the note is being wiped out by the bankruptcy, the bank can’t collect anything from you personally, which means a deficiency judgment isn’t possible. The lender has to settle for whatever it gets from the sheriff’s sale.
It’s a good idea to have your bankruptcy lawyer review the foreclosure lawsuit, just to make sure everything is happening the way it should. But as long as everything is in order, you’ll simply walk away from the property before the sheriff’s sale.