by Jeff Smoot

You receive a notice of default, then a notice of foreclosure and notice of a trusteeís sale. Your house is being foreclosed. Thatís fine, because the house is so far under water that you really canít afford to keep it. You havenít been making payments for months anyway. So you find a rental you can afford and move in a week or two before the foreclosure sale to avoid being evicted after the sale, leaving your sinking ship of a former home behind. You notify the bank that you are moving out. You cancel the utilities. You drive by the house a few weeks later and see that the locks have been changed and somebody has mowed the lawn. The bank has foreclosed. The house is no longer your problem. Right?

Months or even a year or more go by, and you forget about it. Then you get a notice from the city that you will be fined unless you clean up the graffiti that has been spray painted all over the house, or because the grass is six feet tall and blackberry bushes are growing over the sidewalk, or because someone is operating a meth lab in the house. Or you are sued because someone injured themselves on the property as a result of your lack of maintenance or because a gas line exploded, burning down the house and damaging the house next door. Or you are denied government benefits because they say you still own a valuable asset. Or you are threatened with jail time for failing to comply with city or county regulations. Then you realize it. Itís back. Itís yours. And itís not going away.

What you have is a ďZombie Deed,Ē a cute name for an ugly problem facing unwitting homeowners across the country. The zombie is the home you walked away from because you thought it was foreclosed and no longer yours, but unknown to you, the bank didnít finish the foreclosure, so you still own the house and are still legally liable for it. You may have filed bankruptcy to discharge your debt on the property, believing that absolved you of any further responsibility for the house, but it didnít. And if you walked away from a condominium, you are in for an even ruder shock, a veritable zombie invasion of condo dues, assessments and fines, many of which remain your responsibility to pay even if you filed bankruptcy.

The simple fact is, your house is your problem until it is sold or deeded to someone else. And just because a bank has started the foreclosure process doesnít mean it is going to finish it. Banks have a lot of excess inventory these days and arenít always in a hurry to foreclose, which is why some strategic defaulters (people who can afford to pay their mortgages but donít for strategic reasons) can stay in a house for a year or more without paying their mortgage before the bank forecloses. Not going through with a foreclosure is a bankís version of a strategic default. If youíve moved out, and you remain legally responsible for taxes, insurance, and maintenance, why should the bank be in a hurry to foreclose and assume those obligations?

Once you have a Zombie Deed, itís hard to kill it. It is better to not create a zombie in the first place.

ē If your house is in foreclosure, donít move out until the foreclosure sale is completed. In Washington, the buyer at a trusteeís sale is entitled to possession on the 20th day after the sale. To be sure the zombie is dead, attend the trusteeís sale and get a copy of the trusteeís deed which will confirm that the sale has occurred. If the lender postpones or cancels the foreclosure sale, you can continue living in the house ďrent freeĒ until the foreclosure is completed. If you move out before the sale is completed, you may have created a zombie.

ē Rent out your home instead of walking away. As long as the tenant is aware that their tenancy will last only until the bank forecloses, this can be a good solution, especially if you have found a new home and donít want to let it get away. You can use the rental income to pay for insurance and maintenance on the house and monthly dues if it is a condominium or in an HOA (if the association will allow you to rent the unit, some wonít). Under Washington law, a bona fide tenant must receive at least 60-daysí notice to vacate before an eviction proceeding can be started. Under federal law, the tenant may be entitled to 90-daysí notice, and a tenant with a written lease may be allowed to stay in the property for the remainder of the lease term.

ē Let someone you know and trust live in the house in exchange for paying insurance, taxes, dues, assessments, and maintenance. This may be an option if your condo association does not allow you to rent your unit, assuming there is not also a prohibition against even allowing a guest to stay in the unit.

ē Offer the bank a deed in lieu of foreclosure. If the bank accepts a deed in lieu, that will transfer ownership to the bank. As an alternative, consider a short sale of the house which, if approved by the bank and completed, will also transfer ownership of the house to a new buyer allowing you to walk away without further liability. The bank may not accept a deed in lieu or approve a short sale, but it may be worth a try to get your name off of title. (There may be tax disadvantages to a deed in lieu or short sale; you should consult your tax advisor or attorney first.)

ē If the property is subject to unpaid condominium or homeowners association dues or assessments, approach the association to see if they will accept a deed in lieu of foreclosure of their lien for assessments. If so, the association can rent the unit to cover the dues and assessments pending foreclosure by the bank. Condo dues and assessments accruing after a bankruptcy filing are not discharged in the bankruptcy, which comes as a surprise to some debtors who thought a bankruptcy filing would eliminate any further responsibility for the unit.

Filing bankruptcy may not help you kill a Zombie Deed. You can surrender the property in bankruptcy, but that only gives notice that you intend to give the property back to the bank. Even if you surrender the house, the bank still has to foreclose or accept a short sale or deed in lieu of foreclosure to get the house out of your name and alleviate you of financial responsibility for what happens there after you file bankruptcy. It may be possible in a chapter 13 case to include a provision in your plan that authorizes a deed in lieu or other transfer of the property to the bank. In a chapter 7 case, a motion to transfer the property to the bank in lieu of foreclosure could be filed, although the bank might oppose it. Alternatively, filing a motion to abandon the property and force conveyance to the bank, or filing an adversary proceeding on the theory that the bankís refusal to take back the property is a violation of the discharge injunction, are options. It may be worth the effort considering the alternative.

Another incarnation of the Zombie Deed is when an old mortgage or deed of trust that was refinanced and paid off comes back to life because it was not properly released. Because of their complex web of loan documentation and servicing arrangements, banks have increasingly lost track of loans that were paid off through refinancing, loans that are paid current, payments that were made through bankruptcy plans, or even that payments have been made through approved loan modifications. Worse, scam artists target homeowners who have recently refinanced or paid off their mortgages, trying to extract payments where no payments are due. The best defense is to make sure that the lender records a release of the mortgage or deed of trust when you refinance, and keep a copy of the closing file and the recorded satisfaction or reconveyance in your files so you can prove it.

If you have either type of Zombie Deed, or are considering walking away from or filing bankruptcy to avoid further responsibility for an underwater property, you should consult with an attorney to find out your options and take appropriate steps to avoid or eliminate it.

This article is for informational purposes only, and should not be relied upon as legal advice. No attorney-client relationship is created or intended by publication of this article. If you desire legal advice or representation regarding the issues discussed in this article, please contact Highpoint Law Group PLLC.

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