Here’s a quiz. You’ve decided to file bankruptcy to get rid of that big mortgage payment. When is the right time to move out of the house?
1. When you know you can’t afford it?
2. When you fall three months behind?
3. When the bank tells you your house will go to foreclosure?
4. Right before you file bankruptcy?
5. Right after you file bankruptcy?
6. None of the above.
The answer is none of the above. Leaving the house before you have to, can be a very expensive mistake. Especially if you have a home owner or condo association.
When you move out–even if you file bankruptcy–you still own the house. You are responsible. You are responsible if there’s an accident. You are responsible for zoning. You are responsible for paying the association.
The bankruptcy court for sure isn’t paying your home owner association fees. And, if you aren’t paying the mortgage company, they aren’t paying the association, either. That leaves you.
Those after bankruptcy association payments are after bankruptcy debts. That means, they are yours.
I’m seeing people who stop paying and file bankruptcy with me; and four months later the bank has foreclosed them. I’m also seeing a few people who stopped paying and filed bankruptcy with me in 2009 and the bank still has not foreclosed.
If you are still living there, two years for free (except for the association) is a good thing. If you move out and pay rent somewhere, two years of still paying that home owner association–that’s a real headache.
When people talk to me about filing bankruptcy and giving up the house, I tell them, don’t move out! If you have already moved out, rent it!
Before the crisis mortgage companies were quick to foreclose. (At least in Virginia, where foreclosures are easy.) Five months after you stopped paying, you were foreclosed. In the sixth month, if you hadn’t moved out, you would be evicted. Filing bankruptcy right before the foreclosure would get you three more months, but that’s all.
That still happens–a lot. But a lot of times it doesn’t. There’s no way to predict–except that houses with big association fees often sit much longer.
Some of the reasons foreclosures are slow have been in the news. The whole loan modification thing; paperwork problems; the fact that the foreclosure lawyers can’t keep up with the volume.
Some delay is just an investment decision by the mortgage companies.
Suppose there are thirty houses in a little neighborhood and ten of those had mortgages with a bank I’ll call Bank of the Galaxy. Two of those ten have already filed bankruptcy and gone to foreclosure. Galaxy fixed one up and sold it; the other is sitting empty. Seven are current; and the last one is yours–you just filed bankruptcy and you are five months behind.
You and your eight neighbors owe $225,000 on the mortgage and the last house Galaxy fixed up and actually sold went for $110,000. The best offer they have on the one sitting empty was $101,000 and they figure if they have to sell your house too they’d be lucky to get $95,000.
Well, $95,000 is better than nothing, right? Not necessarily. Galaxy is worried about your seven neighbors who are still paying. Those families ask themselves, every month or maybe every week, why are we still paying a $225,000 mortgage on a $110,000 house?
When your house sells for $95,000, Bank of the Galaxy figures one of your seven neighbors will say, that’s it! That neighbor stops paying, files bankruptcy, and now they have another house on their hands.
Bank of the Galaxy would rather have you sit in your house, for a while, then tell everyone in the neighborhood that the houses they thought were worth $110,000 have now dropped down to $95,000. (Here’s a scary article about how foreclosures have knocked three TRILLION dollars off the vlaues of people in the neighborhood.)
Now I said at the beginning, you should not move out until there has been a foreclosure. As your bankruptcy lawyer, that’s easy for me to say; it’s harder for you to do. Because you need to have a place to live lined up.
Nobody much has built either houses or apartments in the last few years. So rents are high, and places to rent are scarce. And it is harder to rent if you have bad credit or have a bankruptcy on your credit report. You need to have a place to live lined up. But if you panic and move out before you have to, you could end up paying the association on an empty house for another six months or a year.
Update: After filing bankruptcy don’t leave that house
I’m writing in Falls Church Virginia in March 2014–our fifth snow storm this year. Stephanie (not her real name) emailed me that she has taken a job next school year teaching in the U. S. Virgin Islands. Doesn’t pay that well, but the weather is great.
You probably don’t have a job offer in the Islands. But here’s how Stephanie’s story affects you.
Stephanie filed Chapter 7 bankruptcy with me to stop a foreclosure in August 2010. She’s lived in her house in Ashburn for three and a half years, without paying either the first or second mortgage. Now that’s very unusual. But it makes my point. Until they throw you out, don’t leave that house.