Underwater New Jersey homeowners surrender homes, but continue to stay

During these dreadful economic times, many New Jersey families are finding themselves behind on their mortgage payments. And while in the past many of these families may have used a New Jersey Chapter 13 bankruptcy as a way to get current on their payments and save their homes, many homeowners are foregoing this option and instead surrendering their homes back to their bank as part of a Chapter 7 bankruptcy - usually because their homes are so severely underwater.

Consequently, many of these homeowners selecting the Chapter 7 route are discovering that although they may ultimately lose their home, they are often able to stay in their homes for several years without having to make any payments.

Chapter 7 home surrender

When filing a Chapter 7 bankruptcy in New Jersey, a debtor's property will be sold and liquidated to pay off outstanding debts. So while they will no longer be liable for these debts, they will lose their assets, including their home.

However, it is important to note that even after you surrender your home to the bank during a Chapter 7 bankruptcy - and sever liability for your mortgage in the process - you still technically own the home, meaning the bank still has to complete the foreclosure process before they can sell your home. And given that filing for bankruptcy automatically stops all debt collection attempts - even foreclosures - the foreclosure process is often delayed after filing for bankruptcy.

However, if a debtor makes it known their intention to surrender their home in a Chapter 7 bankruptcy, the bank can ask the court to permit them to pursue their foreclosure options - which is often routinely granted. But, even after foreclosure proceedings recommence, it can take roughly three years in New Jersey for foreclosures to complete, meaning the homeowners often stay in the home for years without paying any mortgage payments.

New Jersey foreclosures often take longer than other states because all foreclosures must go through the courts, and with the record number of recent foreclosures there is a severe backlog of New Jersey foreclosures right now. In fact, a recent Star Ledger article reported that the average New Jersey foreclosure now takes more than 900 days.

New Jersey deficiency judgments

So if it can take nearly three years to complete a New Jersey foreclosure, why does the debtor need to file for bankruptcy? Well, the short answer is so that they avoid any liability for a deficiency judgment.

Since New Jersey is a recourse state, if the bank ultimately sells a debtor's home for less than is still owed on the mortgage, the bank can go after the debtor for the difference - otherwise known as a deficiency judgment. However, by filing for a Chapter 7 bankruptcy a debtor avoids any liability for a deficiency judgment.

Obviously, every situation is different, not to mention that the time for the completion of foreclosures is not set in stone. Accordingly, it is important to speak with an experienced bankruptcy attorney to learn what your rights are before pursuing options on your own.