What is the difference between surrendering a home and losing a home to foreclosure? Many consumers are confused by the interplay between surrendering a home in bankruptcy and foreclosure. When you file bankruptcy and surrender a home, you give the property back to the lender. When a lender forecloses on your home due to non-payment, they take the home from you. Surrender occurs most commonly in states like Arizona, Florida and California where the housing bubble has burst with the most severity.
Although there are peculiarities based on state law, the basic idea behind a mortgage is fairly consistent nationwide. Mortgages are security agreements whereby the collateral for the loan (your home) can be taken by your lender in the event payments are not made. When you sign loan documents to finance the purchase of your home, you agree that your lender can take your home from you in the event you do not comply with the terms of the loan (the most important of which is making monthly payments of principal and interest). If you fall behind on your mortgage, your lender forecloses pursuant to your agreement and becomes the new owner of your house.
It is important to understand that your lender will be required to foreclose on your home in order to clear title even if you have surrendered it through bankruptcy. Your credit report will likely reflect the foreclosure. The foreclosure is still a necessity to clear title from your name. Your property will be sold at auction and in order for your lender to convey good title to a third party purchaser, they must acquire title themselves first.
The fact that a foreclosure will take place even after a home has been surrendered is where the similarities end between surrender and foreclosure. Surrendering a home in bankruptcy extinguishes your liability on the loan. You throw the keys back to your lender and you’re done. Your lender cannot come after you personally for what once was a full recourse loan. By contrast, in a foreclosure setting, your lender will take your home and sell it to the highest bidder. If the sale price is enough to satisfy the outstanding balance owed on the mortgage, you will not owe money after foreclosure (be careful as some loan documents call for borrowers to pay lender attorney fees associated with the foreclosure). If your home sells for less than what is owed on the mortgage you will owe the difference. In most cases, post-foreclosure your lender will sue for the shortfall in an attempt to establish a deficiency judgment. Once judgment has been entered, your lender can then attempt to come after your non-exempt assets in satisfaction of the debt.
In summary, the primary difference between surrendering a home and foreclosure is the possibility of owing money after the sale. When a home is surrendered, a foreclosure will ensue but only as a means of clearing title so the bank can sell the home. In a foreclosure which takes place outside of the context of a surrender, the borrower can end up owing the difference between the mortgage amount and the sale price the home fetches at the foreclosure sale.
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