Consequences of Surrendering Real Estate

A property is a critical financial asset for the vast majority of us, yet the consequences of surrendering real estate property in a bankruptcy are not well understood. However, we should be worried about these consequences. It is essential to evaluate all potential outcomes before surrendering your property.

Consequences for Your Credit

The most immediate consequence of surrendering a piece of real estate to the bankruptcy court is that it will appear on your credit report as a foreclosure or deed-in-lieu. This negative mark will remain on your record for seven years from the date it occurred and may make it harder for you to obtain credit in the future. This usually isn't a problem if it's a home you no longer own; however, if you've sold the property before filing for bankruptcy, then you'll need to consider other options than surrendering the deed to avoid this negative mark on your credit report.

Consequences for Your Taxes

When you surrender real estate in bankruptcy, it is no longer considered an asset on your bankruptcy filing. This means that you no longer have to pay taxes on the property's fair market value, which is typically higher than what you paid for it. However, there are some exceptions to this rule. For example, suppose you surrender real estate that has been mortgaged or encumbered with a loan, and the lender takes over the property after your bankruptcy filing. In that case, the lender will be responsible for paying any taxes owed on the property's sale. It's also important to note that if you have already paid property taxes on this property before your bankruptcy filing, then these taxes cannot be discharged in your case.

Consequences for Your Bankruptcy Discharge

If you surrender real estate in bankruptcy, your discharge can be affected in two ways: If you receive a free and clear title to your home by means of a deed in lieu of foreclosure, it will not affect your bankruptcy discharge unless the deed was "fraudulent conveyance" under state law or involved actual fraud by the debtor (such as hiding assets).

Suppose there is no deed, and you simply hand over possession of your property back to the lender and stop making payments on it. In that case, it can affect your bankruptcy discharge if there is a prepetition lien against that property that was not released or discharged prior to filing for bankruptcy protection.

Overall, homeowners should consider all the options before handling a foreclosure. The consequences of surrendering real estate in bankruptcy can last a lifetime when done irresponsibly and incorrectly. Bankruptcy can be a powerful tool, but it's not the right solution for everyone.