Blog

Can’t I just give the house back to the bank?

Talk about a loaded question!  Just the other day I was talking to a client, in a probate case, and she asked this question of me. It really is a loaded question though.  YES, you “can” just give it back BUT….

Let me start by saying there is simply no one size fits all answer to this question. Each case needs to be looked at individually as different facts create different answers.  The issues I am concerned about include: are there other assets, how upside down is it, is it a purchase money mortgage or a re-fi, is there a second mortgage or line of credit, and the list goes on.

Let’s take the fact pattern of the client who asked me the question shall we!? In Joan’s case the house is approximately 20% underwater. That is, the house is worth about $500,000 and the mortgage (a re-fi) is about $600,000.  In Joan’s probate matter there ARE other assets that’s a key issue.

First of all I would put the mortgage company on my list of creditors and send them notice to force them to file a creditor’s claim. Most of them won’t file that claim and it’s my position that this will make it extremely difficult for them to make a claim for a deficiency judgment against the other probate assets.

Second I would offer the bank a “deed in lieu” which is a deed in lieu of foreclosure. Put another way that means I would offer to deed the house back to the bank and agree that the bank would not foreclose and not go after a deciency amount. In my experience most banks will not take deeds in lieu in probate but it’s worth asking about.

If they the bank says no to the deed in lieu I would then consider doing a probate code 10360 mortgage cram down.  Most likely your probate attorney doesn’t know about this code section but before they tell you to walk away from the house or do a traditional “short sale” tell them to read California Probate Code sections 10360 et seq.  Tell your attorney that a probate expert says they should understand 10360 and it’s potential benefits to the estate and, most importantly to you, to the administrator of the estate!

Ok, so what is PC 10360? It is a second that allows you to get a Court order which requires the bank to release the mortgage lien for less than the mortgage in an amount necessary to pay costs of administration related to the real estate.”  It works best when there are no other assets but it can work in cases with other assets. In any event it works as a forced short sale which allows the house to be sold and thus the probate closed.

In a case with no other assets it actually can move money from going into the bank’s pockets and instead put that money into your pocket!  Yes, you read that correctly. I did one of these recently in Marin county where I was able to get $13,000 out of an upside down house into my client’s pockets!

The key with upside down real estate is to work with a probate attorney who knows all of the options. Do not settle for an attorney that says they do probate but instead find a probate attorney!

-John