I’m not sure if you have heard about or experienced the “bank walk away”. If not, it’s coming to a neighborhood near you. A bank walk away is generally a property in one of the following situations:
1. The bank begins foreclosure, the occupants move out, and the bank figures out they don’t want the expense of foreclosing on the property for whatever reason, so it sits empty. The borrower assumes that the foreclosure took place and moves somewhere else not realizing they still own it as the title continues to show.
2. The bank begins foreclosure, the borrower files for bankruptcy. The bank never files a Proof of Claim or moves to lift the automatic stay. The borrower’s bankruptcy lawyer tells them to move out of the house thinking the bank will take back the property, but the bank never does and the property sits vacant while the property owner sits wondering what the heck is going on. A lawyer may tell you that “You don’t own it anymore” which is WRONG. Don’t be fooled by the thought that once the bankruptcy is discharged that you can wash your hands of any future liability associated with it. That just is NOT true.
This is happening all around you, especially to borrowers who had loans with Bank of America and its predecessor, Countrywide Home Loans. There are people all over the United States who are either completely unaware about their continued responsibility for their former home or trying to figure out what to do with these homes that the bank didn’t foreclose on during the bankruptcy or post bankruptcy period.
3. The bank never begins foreclosure because it realizes that it’s never going to recoup any money and is never heard from again. People who were initially being foreclosed on are low income and were using the property as a place to live. When they move out thinking the bank is going to foreclose, guess what? It sits vacant open to vandalism and crime for months at a time, even years.
Now I cannot advise as to legal consequences resulting from a bankruptcy, but several lawyers have informed me that once the debt is gone, the lien is gone too. Yes, you heard that correctly: It might be that once the DEBT is discharged, the LIEN goes with it. If this is true, it means that the bank has to foreclose before the debt is discharged, otherwise they may not be able to foreclose later.
However, I am currently in escrow on a property in Long Beach where the property was included in a Chapter 7 bankruptcy and the debt was discharged. The client was no longer responsible for the mortgage payoff to the lender. My company then sold the property through a “short sale”. The lender in first position will receive their loan amount paid in full and the second trust deed holder will receive approximately 75% of their loan amount at the close of escrow. Both lenders submitted demands to escrow for their respective pay-offs.
This would indicate to me that the lien is not released through a bankruptcy proceeding but the borrower’s liability for the debt is. The lien can only be paid off through a deed in lieu, short sale or foreclosure AND until one of these actions is completed, the homeowner remains on title as the owner of record.
For those of you in foreclosure and bankruptcy, it wise to remember:
1. You own it until you don’t. If the bank never forecloses, it’s still yours. You are still responsible for the upkeep, maintenance and taxes on the property. Be cognizant about this. Continue to check on the property to ensure the security of the dwelling, condition and whether it may be the target of a fraudulent tenancy while you are still named as the owner of record.
2. If you are filing bankruptcy, talk to your lawyer about whether to remain in the property. Lawyers are advising homeowners to move out because they need to surrender the property to the trustee. In my opinion, it is best to remain in the property for as long as possible or until you are served with eviction papers.
Consider the financial impact on homeowners who have lost their homes due to hardship or catastrophic circumstances. What if the bank never forecloses? They could save thousands of dollars they desperately need while keeping a roof over their heads.
3. Consider the picture from the bank’s perspective. Why would or wouldn’t they foreclose during the bankruptcy or attempt to foreclose post bankruptcy? Are there obvious reasons why it would not be in their interest to attempt foreclosure? There must be an underlying financial reason that the banks are not foreclosing or could it be an inadvertent oversight or paperwork snafu?
4. More importantly, keep your insurance in place. The reason for this is because if the property remains vacant and you cancel the insurance who do you think will be personally sued in the event of an injury on the property, fire, theft or other property damage? Check with a lawyer on how to indemnify yourself if you’re in this situation, and check with your insurance agent on whom the payout should be made to if the debt has been discharged and whether you should carry vacancy insurance on the property. If you owe no further debt due to a bankruptcy discharge are you certain that the bank should be the recipient of the settlement?
5. Keep paying your HOA dues. This is for your own best interest. You are responsible for any and all HOA dues until you no longer own the property. Get too far behind and you’re going to be saddled with a lien until the bank forecloses or title is transferred out of your name. If you filed bankruptcy, you are still responsible for HOA costs after the discharge.
6. Be careful signing anything with the bank post discharge such as a loan modification agreement. Check with a lawyer before you do this or if someone is encouraging you to do this. There should be absolutely no reason to agree to a modification of a mortgage that you no longer have any financial responsibility for. Think about it.
I hope that these issues have enlightened you to the obvious and not so obvious perils associated with a “bank walk away” situation that could happen to you.
****DIANE WHEATLEY IS NOT A LICENSED ATTORNEY. THIS INFORMATION IS COMPRISED OF HER OPINIONS, OBSERVATIONS AND INTERPRETATIONS AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL ADVICE. PLEASE CONSULT WITH AN ATTORNEY BEFORE RELYING ON OR TAKING ANY ACTION BASED ON THE INFORMATION PROVIDED HERE.****