Chapter 13: Severance of a Home to Lender

Bankruptcy is a tool that is used to help you get back on your feet. Our lawyers want to help you lead a productive and happy life, and part of that process is addressing your debt. Let us use our experience to find a solution for you and your family.

At Atlas Consumer Law, we provide our clients with sound legal advice and representation. We are knowledgeable of the law and skilled at understanding and guiding clients through legal techniques and processes. Located in Lombard, Illinois, we serve clients in Chicago and the surrounding areas.

Contact a Chicago bankruptcy attorney to discuss the possibility of a severance. Contact us online or by calling us at (312) 313-1613.

Severance Is Another Option

There are a number of different options that are available to individuals who are trying to deal with mortgage debt. Individuals might use a deed in lieu, a short sale or a foreclosure. For people who do not want to waste money or time on costs there is another option: severance.

When you buy a house, the mortgage is a pledge for the title to real property. You sign a promissory note that connects you to the loan by making you responsible for payment of the mortgage. An individual in a Chapter 13 bankruptcy can sever the mortgage from the note in full satisfaction of the secured claim.

So what does that mean? By severing the note from the mortgage, you essentially surrender the interest in the property to the mortgage holder, thereby relieving yourself from personal liability on the secured claim. Severance is a very powerful tool.

Example of a Severance

To put this concept into context, let's take the example of Blake and Crystal.* Blake is a doctor and Crystal is a lawyer. They have a lot of money in the bank and they own quite a few assets. Additionally, they own a home that is worth $400,000 dollars, and they owe $400,000 on the first mortgage and $100,000 on the second mortgage.

In total, they owe $500,000, which means the house is upside down they owe more on the house than it is worth. Because Blake is a doctor and Crystal is a lawyer and they make a good living, their lender is not responding to any kind of settlement on the house. Blake and Crystal can file a Chapter 13 severance.

In doing this, the title of the home remains in their name, but their personal liability for the secured claim (which is $400,000) is severed and they owe the bank nothing for that portion. Additionally, Blake and Crystal will not lose one asset in this form of bankruptcy.

*Blake and Crystal are fictitious characters created for the purposes of explaining and illustrating various bankruptcy situations.

Our attorneys understand all aspects of debt relief. Contact us online or by calling us at (312) 313-1613.