Who Is Responsible for Home Insurance When the Owner Files Bankruptcy?

by Cara O'Neill
Homeowners may surrender their house yet find themselves still legally liable.

Reducing expenses when filing bankruptcy is not only natural, it’s prudent – and so is the desire to eliminate costly home insurance. In some circumstances, however, cost savings steps end up costing more down the road, and prematurely eliminating home insurance falls into this category. When making home insurance decisions after filing bankruptcy, timing is everything.

Purpose of Home Insurance

Home insurance serves two purposes: it insures the property against covered damage and provides liability protection against lawsuits brought against the homeowner. Therefore it is in the best interests of most homeowners to carry the protection home insurance affords as long as they remain the property owner of record.

Effect of Filing Bankruptcy

So the question is, “Does filing bankruptcy change title from the homeowner to the lender?” The answer some find surprising is “No.” While bankruptcy severs the obligation to pay a debt to a creditor, it does not take the additional step of transferring title at the local recorder’s office. So the title holder of record does not change until an action occurs that triggers the filing of new title documents. This usually occurs when the property is sold or foreclosed upon.

Retaining the Home

If you plan to remain in the home, and if you take all necessary steps to do so, the answer is straightforward. You are responsible for maintaining home insurance in accordance with the terms of your mortgage.

Surrendering the Home

If you intend, however, to let the home go back to the lender, an action known as “surrendering” the home, then the answer is not as simple. The problem is that as long as you are the owner of record you carry the risk of being sued for injuries occurring on the property. Not only is this true even if you are not in possession of the property, but it’s exacerbated by the fact that you cannot maintain the property in good condition without access. Unfortunately, many lenders fail to expeditiously change title for this very reason. Simply put, they don’t want the liability either. As a result, it’s not uncommon for a home to remain in an individual’s name long after possession is surrendered. Without home insurance, the fact that you've already filed bankruptcy poses an additional problem. Specifically, if a judgment is entered against you, you will not be able to file a second bankruptcy for a number of years, which means the judgment holder may initiate collections efforts against you, such as garnishing your wages. While you may have an argument that you were not in possession and therefore the lender is responsible for the judgment, a finding against the lender will likely require costly litigation. Of course, it is unlikely that this scenario will unfold in your situation. However, it is possible, and at the end of the day, only you can assess your risk level and take the necessary steps to protect against it.

About the Author

An attorney for more than 20 years, Cara O'Neill currently practices in the areas of civil litigation, family law and bankruptcy. She also served as an Administrative Law Judge and taught undergraduate and graduate courses in the areas of employment law, business law and criminal law for a well-known university. Attending the University of the Pacific, McGeorge School of Law, she graduated a National member of the Order of the Barristers - an honor society recognizing excellence in courtroom advocacy. She is currently licensed in the state of California.

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