Bankruptcy

Thoughts on When to "Walk Away"

By Bill McLeod, Esq.

There are many reports of struggling homeowners ?walking away? from their properties. If you own a condominium, shares in a cooperative or a lot or home in a housing association (which I?ll refer to here as ?real estate?) and you?re contemplating walking away and bankruptcy, an amendment to the Bankruptcy Code may influence many of your decisions.

Prior to the passage of the 2005 Act, if a bankruptcy debtor wanted to surrender their real estate, they could simply ?walk away.? Real estate owners who owed dues or assessments to condo association, homeowners associations or cooperative corporations could simply include those claims in a Chapter 7 discharge or exclude them in a Chapter 13 plan. In addition, owners who did not reside or who had rent paying tenants in the property they intended to surrender were not responsible for post-petition condo fees and assessments. But that has changed.

By the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 523(a)(16) (?Exceptions to Discharge?) was amended. Instead of limiting the discharge of fees and assessments only to those debtors who had tenants or who were not residing in the dwellings, Congress limited it to debtors who have a ?legal, equitable or possessory ownership interest? in the real estate.

Simply because a homeowner expresses an intention to surrender the home in their bankruptcy case does not mean that they will still not be the ?legal, equitable or possessory? owner of the property. Condo owners who move out into a rental and file bankruptcy prior to any foreclosure are going to be responsible for post-petition condo fees and assessments. Whether the debtor lives in the property is no longer a consideration thanks to the 2005 amendments.

Prepetition condo fees and assessments still fall under the discharge. What?s changed is the responsibility for post-petition fees and assessments while the home is still in the debtor?s name. People who are considering bankruptcy protection as well as surrendering their property should be sure to carefully plan the date of their filing and/or their moving out with their attorney. The last thing any financially strapped debtor needs is to be paying rent on a new dwelling and trying to rebuild their financial house, all while paying the condo fees and assessments on a home the bank has not yet taken by foreclosure.

Full post as published by McLeod Law Offices on March 14, 2008 (boomark / email).