A Chapter 13 plan can make your lender take back your real estate, so you won’t keep owing the ongoing homeowners association fees.
On October 14, 2014, an Oregon bankruptcy judge determined that if you want to surrender your home to your mortgage lender, under a Chapter 13 “adjustment of debts” plan you can require that lender to accept title to the home right away. As a result the mortgage lender can’t just delay foreclosing, can’t keep avoiding becoming the title owner. This may be a great way to get the title out of your name so that you stop being legally obligated, month after month, for ongoing homeowner association dues and assessments.
In this blog post we give you the legal background, the Catch-22 that foreclosure delay can put you in, and the solution this new ruling presents. In our next blog post in a few days we’ll get into the practical consequences of this ruling, including what it means that the mortgage lender in this case has just filed an appeal of the ruling.
Here’s the Legal Background
When you file a bankruptcy case, in general you can discharge (legally write off) debts that you owe as of the date you file the case but you can’t discharge new debts that arise after that date. However, if you have a debt secured by a home or a vehicle, if you surrender the home or vehicle you can discharge the entire debt, regardless that some of the payments were originally due well after the date you filed the bankruptcy case. For bankruptcy purposes the entire mortgage or vehicle loan was a debt at the time the bankruptcy was filed, so it can all be discharged.
But how about ongoing monthly HOA obligations? Upon surrendering the home can you discharge your entire obligation to the HOA, currently due as well as future ones, as with a mortgage or vehicle loan. Or can you only discharge those HOA obligations which were due at the time but not future ones?
In Oregon the answer is the latter—you can’t discharge future-owed HOA obligations. Why? Because those obligations are based not on some debt agreed to in the past but rather are based on your ongoing legal, titled ownership of the property (your home) that is subject to the HOA dues or assessments. So, you are obligated on each new monthly dues/assessments for as long as you are legal owner of the property, whether or not you have physically surrendered the place to your lender. You continue to be obligated on the accruing HOA dues/assessments until the lender takes back the property through a completed foreclosure (or by accepting a deed in lieu of foreclosure).
Here’s the Problem
That’s OK if—as before the Great Recession—mortgage lenders are relatively quick about foreclosing. After all, once you’ve decided that you won’t be making any more payments the lender usually wants to get whatever cash it can get out of a property as soon as it can by taking ownership and selling the property.
But for a variety of reasons during the last few years lenders have often been dragging their heels about foreclosing and becoming the title owners of homes—often doing nothing for many months or even for years. One reason they hold off foreclosing is that they don’t want to become liable on HOA dues and assessments, as they do once they become the title owner. So if a lender believes that it will not be able to sell a home quickly, it doesn’t foreclose in order to avoid those HOA liabilities.
The problem for homeowners in financial distress who need bankruptcy relief is that this leaves them in serious limbo. They need relief from their other creditors and want to move on with their lives. Sometimes the financial urgency is intense—such as when they are being subjected to lawsuits and wage garnishment and other serious collection action. But if they have ongoing HOA obligations, they are sensibly reluctant to file bankruptcy as long as the home that they want to surrender continues to be in their name because their mortgage lender is not moving ahead with a foreclosure. These homeowners realize that bankruptcy won’t discharge the future monthly HOA obligations that keep accruing after they file bankruptcy, as long as their mortgage lender has not completed a foreclosure.
Here’s How the New Ruling Cuts through the Problem
Now in this new ruling, called In re Watt, the judge decided that the bankruptcy court has the authority under the federal bankruptcy statutes to approve a Chapter 13 plan that transfers real estate ownership to the mortgage lender. And the judge went a big step further, ruling that the mortgage lender would have to accept title to the real estate even if didn’t want to. So this gives homeowners the right to transfer title to their mortgage lenders, over their lenders’ objections, in order to cut off the homeowners’ liability for future HOA dues and assessments.
This is huge.
And at least from the language of the ruling, it seems like this judge is going against the grain of some previous bankruptcy judges’ decisions elsewhere in the country. So it’s not clear whether this ruling will withstand the test of time.
The Halloween Twist
And the first test arrived right on time, on Halloween. The judge’s order approving the Chapter 13 plan which transferred title to the Watts’ home was signed by the judge and filed in court on October 17, 2014. Bankruptcy rules give 14 days for parties to appeal an order. So right on time, on October 31, the mortgage lender here, the Bank of New York Mellon, filed a notice to appeal that order. The bank is represented by the biggest law firm in Portland.
Our next blog post in a couple days will explain what this appeal means in practical terms, after describing the bankruptcy judge’s sensible and refreshing rationale for ruling as she did.