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A.J.
A.J., Attorney
Category: Bankruptcy Law
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Experience:  Experienced consumer bankruptcy attorney.
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I declared a Chapter 7 bankruptcy in MD in 2011 which was also

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I declared a Chapter 7 bankruptcy in MD in 2011 which was also discharged in July 2011. I included one of my homes. A year later, I began renting out that home for much less than the mortgage. However, I kept the money instead of giving it to the bank, since I assumed my hands were clean from them. Can I continue collecting rent, and can I also initiate a short sale of the property? By the way, my bankruptcy was filed in Virginia.

SavyLawyer :

Hello, and thank you for contacting Just Answer. My name isXXXXX am a bankruptcy law professional, and I look forward to answering your question today.

SavyLawyer :

Just to be clear, I need a little bit more information:

SavyLawyer :

(1) Did you "reaffirm" the debt on the mortgage before you bankruptcy case was discharged and closed?

SavyLawyer :

(2) Do you hold title to the home or does the bank? Have foreclosure proceedings been initiated?

Customer:

No, I haven't reaffirmed the debt.

Customer:

The bank holds the title

Customer:

I have received Notices of Intent, but that's all so far

SavyLawyer :

Ok, thank you for the extra information. If you did not reaffirm the debt, then the debt was discharged (meaning the debt is no longer owed). However, the bankruptcy does not change the security interest that the creditor bank holds on the property. Consequently, the question of who rent should go to is really a question of who the legal owner of the property is, and thus who has the authority to rent the property out.

SavyLawyer :

If the bank holds title to the property (meaning the title/deed is in their name and it has been recorded), then the bank is the owner of the property. In such a situation, any rents that are charged for occupying the property should go to the rightful owner, and if the bank is the rightful owner, that is who rent should be going to. Consequently, it probably is not wise to be collecting rent in a situation such as the one you describe.

Customer:

So, I should not be engaged in short sale negotiations with them?

SavyLawyer :

A short sale is no longer necessary in such a situation. The bankruptcy should have already taken care of the mortgage debt, wiping it clean. A short sale is intended to clear the debt by selling the house, but the debt should already be cleared from the bankruptcy. While the debtor no longer owes on the debt, the creditor bank then has the right to foreclose and seize the property.

SavyLawyer :

In addition, if they already "own" the house (meaning the title/deed is already in their name), then there really would not be any property interest for you as the debtor to sell.

SavyLawyer :

Short sales are generally something used to try and avoid bankruptcy. Post-bankruptcy, a short sale would not be necessary or really even possible, because there is no debt to resolve, it has already been resolved in bankruptcy.

SavyLawyer :

So, in summary, a short sale is not appropriate (or really even possible), where the underlying mortgage debt has already been resolved through bankruptcy.

Customer:

I see. The only reason I was opting for the short sale was to lessen the impact on my credit.

SavyLawyer :

Post-bankruptcy, there should not be any further impact on credit, the damage to the credit has already been done with the bankruptcy. Certainly, when your attorney is back in town, talk to them about these issues, that is who you should ultimately be dealing with these issues with. Also, it would not hurt to contact the bank to see if they are willing to have you sell the house and have them take the proceeds in exchange for dropping the lien on the property and avoiding the foreclosure, but truth be told at least both from a debt and from a credit perspective, it may be a waste of time. That would be similar to a per-bankruptcy short sale, only without the need to resolve the debt, and I'm just not sure that there would be any benefit to you as the debtor, and it would take time and resources to deal with the sale. Most people who have wiped out a home debt in bankruptcy and are walking away from the property just let the bank foreclose and take the property back.

SavyLawyer :

I hope this helps answer your question, and let me know if you require any additional information. Otherwise, please remember to RATE my answer so that I can receive credit for my work.

Customer:

I just learned from my agent that the title IS in my name.

SavyLawyer :

In that case, if the title is still in your name and you are the legal owner, you may still be able to collect rent without any problem, until the bank actually does foreclose. Again, I would confirm with your bankruptcy attorney to make sure that the status of the debt and the lien on the home is clear, but so long as you are the legal owner of a property you can rent it out, although you would have to inform your tenants of the risk of foreclosure.

SavyLawyer :

You could end up causing your renters harm if the foreclosure does occur, and it could potentially put you in breach of a lease agreement, which could make you liable to your renters. So, ultimately, it is probably better not to be renting out a property that there is a good chance that it will be foreclosed on. However, as a general matter the legal owner of a property does have the right to rent it out, so long as they remain the legal owner of that property, and so long as they are aware of the potential complications that can arise from and for their tenants should foreclosure be pursued by the bank.

Customer:

Sorry. I can't seem to see whether you've seen my last message regarding the deed.

SavyLawyer :

No apologies necessary, I did see it. I will re-post my follow up message so that you can (hopefully) see it:

SavyLawyer :

In that case, if the title is still in your name and you are the legal owner, you may still be able to collect rent without any problem, until the bank actually does foreclose. Again, I would confirm with your bankruptcy attorney to make sure that the status of the debt and the lien on the home is clear, but so long as you are the legal owner of a property you can rent it out, although you would have to inform your tenants of the risk of foreclosure.



 




You could end up causing your renters harm if the foreclosure does occur, and it could potentially put you in breach of a lease agreement, which could make you liable to your renters. So, ultimately, it is probably better not to be renting out a property that there is a good chance that it will be foreclosed on. However, as a general matter the legal owner of a property does have the right to rent it out, so long as they remain the legal owner of that property, and so long as they are aware of the potential complications that can arise from and for their tenants should foreclosure be pursued by the bank.



SavyLawyer :

I hope that helps clarify the issue, and I would again strongly encourage you to discuss all of this with your attorney when they return. Let me know if you need any additional information. Otherwise, please remember to RATE my answer so that I can receive credit for my work.

Customer:

Thank you for helping!

SavyLawyer :

My pleasure! I am glad that I could be of some help, and feel free to request me directly in the future should you have any questions. If you do not have any additional questions, please remember to RATE my answer so that I can receive credit for my work.

Customer:

Thanks!

SavyLawyer :

My pleasure.

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