Secured Debt has 2 Parts
1. Debtor’s Personal Obligation to Pay Back the Loan
2. The Lender’s Security Interest, the Lien
What is the actual meaning of property ownership after bankruptcy surrender? The bankruptcy discharge removes a debtor’s obligation to pay the debt, assuming the debtor has not signed a reaffirmation agreement (agreeing to be financially responsible for debt, after bankruptcy discharge). However, until there is a legal transfer method used to transfer the property out of the debtor’s name, the debtor still owns the property. Many times, debtors contact my office after they have filed a Chapter 7 bankruptcy petition, received a discharge, and the bankruptcy case is closed with questions.
A common scenario occurs when a debtor agreed to surrender his home in the bankruptcy because the property was underwater (property worth less than what is owed on property). The discharge occurred and the bankruptcy case is closed. The debtor believes that because he signed a document surrendering the underwater property during the bankruptcy, that he no longer owns the property. The debtor believes that he can simply walk away and find new housing. Or after bankruptcy discharge, the debtor moves out of the property and gets new housing. This is partially correct. The debtor can walk away and get a fresh start. A fresh start is a primary reason for filing bankruptcy. However, until there has been some legal method of transferring the property out of the debtor’s name, he still owns the property. And, he is still legally responsible for the property. The first thing that I advise is to physically keep up the property and to maintain insurance on the property. I make these recommendations whether the debtor is living in the property or not. Why? Because if someone were to get hurt on the property due to the debtor’s negligence, the debtor is still legally responsible as he still owns the property.
In order for the debtor to no longer own the property, the lender either during the bankruptcy, after requesting permission of the bankruptcy court, or after the bankruptcy discharge, has to use a legal method to change ownership from the debtor back to the lender. Ways used to change legal ownership include a foreclosure, short sale, or deed-in-lieu, where there is a legal property transfer. It is important to remember that even though you might have agreed to surrender your property in a bankruptcy, until there has been a legal property transfer, you are not legally obligated to pay back the loan, however, you still own and are legally responsible for the property