Foreclosure-Burned to Ground

[BK'd-Betty]

Just found this forum, and it's wonderful! Congrats on such a sucessful forum!

I'm in a pickle. I filed a Chapter 7 BK and was discharged 10 months ago. I "surrended" my home which is still in the foreclosure process. There is a sale date set, but now, the house has burned to the ground!

It's a total loss, nothing left. Arson is suspected. I am not a suspect, however, as my house is in New York State and I currently live in San Diego.

House is fully insured (by me) for replacement value. HOWEVER, Lender wants *me* to re-build the house with the insurance money so they can re-sell it.

I just want to sign the insurance settlement over to them.

I don't know anything about re-building a house and how the heck can I do that from 3000 miles away?

I'm afraid that even though the loan was "discharged" in BK, the property securing the loan no longer exists. Does that mean I owe the balance on the loan, or do I have to re-build the house for them.

If I sign the insurance settlement over, would I be responsible for demolition of the smoldering remains? And what happens to the land? Soooooooo many questions.

Anyone ever hear of a situation like this? I don't know what to do!!!!!!!!!!

[HHM]

Ummm, that is a pickle.

Since you say "house", I will assume we are talking about a single family residence that sat on a piece of real estate, right?

Also note, strictly speaking, "secured" debt is NOT discharged in BK. After all, if it was discharged, there would be no foreclosure. What does get discharged is any deficiency balance, i.e. the difference between what is owed and what the property is worth, if the amount owed is more than the value of the property. However, the secured creditor maintains a right to the property and if you do not continue to pay the amount owed, they can repossess (or foreclose) on the property and sell it to try and recoup the balance of the loan you are giving up.

Logically, I don't think the bank can force you to rebuild the home, after all, the purpose of having insurance is just for this kind of catastrophe. Under normal circumstances, if you were the owner of the home, with a mortgage and the house burned down 2 things could happen (1) the bank agrees to allow you rebuild and floats your mortgage during construction and you use the bulk of the insurance money to rebuild, or (2) you pay off the mortgage with bulk of the insurance proceeds, and use what ever is left to buy a new home, or whatever. In the end, the bank only cares, or should only care, about getting the mortgage paid back.

The odd thing here is that this event occurred "during" foreclosure. However, I can't imagine the analysis is any different. Are the insurance proceeds enough to pay off the mortgage.

My advice would be to stick to your guns on this one, I do not think they can make you re-build the home. What you want to do is find out what exactly is due to the bank, so you want to request the buyout...and then offer them enough insurance proceeds to make the bank whole. However, if they start getting obstinate, you will probably need to speak to a real estate attorney in New York.

[BassBoy]

I agree with HHM about paying off the mortgage, or paying off as much as possible instead of the re-build. I also agree that the bank probably doesn't care about the actual dwelling itself, but rather, getting the money.

[SinkingFast]

An Arsen Investigation almost always follows a fire.

Hubby's truck caught fire and burned up years ago. The Fire Dept had to complete an Arsen Investigation before our auto insurance would pay.

Our neighbor's house burned down. Same thing. An Arsen Investigation before their insurance would pay.

It's just a matter of the steps Insurance Companies go thru before paying off a claim.

Just because they are investigating, does not necessarily mean the fire was caused by Arsen.

[BK'd-Betty]

Thanks so much for the replies.

I state that Arsen was suspected, and is being investigated because excellerant was found to be present in many areas of the house. There is other evidence of vandalism as well. It is believed the the house was burned down by vandals.

The insurance company hasn't paid me a dime yet, and they are not giving me a hard time about the payment, they will cut a check once all the paperwork is settled.

The insurance payout will be enough to pay off the mortgage, however, it will NOT be enough to excavate/demolish the smoldering remains of the house that used to sit on the lot. (yes, this was a single family home on a small 60x100 lot).

So, if I pay off the mortgage, I'm left with a piece of land with the charred remains of my old house, that I have to do something with. The county will not allow the house to remain as is.

So, I'm totally screwed, unless I can negotiate with the Lender to take less than what is owed?

Maybe I can negotiate with the Lender to take the remainder of the money after the clean up and GIVE them the land?

I don't know, I'm so confused right now. I just thank god I kept the house insured!!!!!!

[HHM]

Geezzz, this is a tough one. To clarify, the house is "in the process of foreclosure" or it "has been foreclosed"

There has to be some value to the "land", so I guess the number you would try to reach with the bank is the difference between what is owed and the land value and still have the bank take deed. Basically, the bank was foreclosing because you essentially surrendered the house in your BK...and before the Bank could complete foreclosure, the house was burned down. I suppose the real question is, are you really liable at this point because you filed BK. In the typical foreclosure the owner bares the risk of loss up to the date the title changes hands...which is why you are required to maintain insurance until the deed changes hands...in most HO insurance policies, the mortgage bank is listed as a loss payee, so usually the insurance company will cut a check directly to the bank. I suppose, you still bare the risk of loss, but you have insurance.

I think what will ultimately happen is, your insurance will end up paying the bank a certain amount of money...the property will still be foreclosed on...and you will probably end up paying for clean-up.

As far as clean up, I really don't know what to tell you there. You may get stuck with that bill.

[poorme]

HHM - let's look at this another way. I would think the land goes with the house, as part of the deed package. In a 'typical' bk/foreclosure when the owner loses the house, the land goes with it. If the house was in run-down condition and needed repairs following the foreclosure in order to bring it up to spec for resale - that's the bank's problem. They have insurance policies for that. In this case, the clean-up of the lot becomes - in my mind - the equivalent of window/floor/roof repairs the bank may have to do. There's no house to fix - there's a plot of land to fix. Same difference, they're just not going to make a tidy profit this time. I believe that the land deeds over to the bank at sale. They become the owner and get to do the cleanup. But, I will certainly love to hear what a real estate pro has to say on this one...

[HHM]

HHM - let's look at this another way. I would think the land goes with the house, as part of the deed package. In a 'typical' bk/foreclosure when the owner loses the house, the land goes with it. If the house was in run-down condition and needed repairs following the foreclosure in order to bring it up to spec for resale - that's the bank's problem. They have insurance policies for that. In this case, the clean-up of the lot becomes - in my mind - the equivalent of window/floor/roof repairs the bank may have to do. There's no house to fix - there's a plot of land to fix. Same difference, they're just not going to make a tidy profit this time. I believe that the land deeds over to the bank at sale. They become the owner and get to do the cleanup. But, I will certainly love to hear what a real estate pro has to say on this one...

Although I like where your headed with this, I don't think it works in this case...the bank "loaned" the money on the premise that this deal was for "improved real estate" (meaning the land has a house on it). I think there is a difference between a rundown house and the bank foreclosing (they do assume the risk) and no longer having a piece of "improved real estate" (because the house burned down). However, the land has some value, so the bank can still auction the land at foreclosure, but it will receive significantly less (in most markets) than if the land had a house on it...thus, I think the insurance policy will be used to make the bank whole.

Also note, in an up real estate market...if the bid for the property at auction exceeds what the bank is owed, the bank DOES NOT GET TO KEEP that money, it goes to the debtor. The banks profit if they are able to get what they are owed (principal plus interest), but they don't get equity.

[IN-DEBT]

BK'D BETTY,

Most insurance policies have an additiional coverages section in them that pays for debris removal for this reason. It is over and above the home limit and is usually 5% of coverage A or the limit on the home. Therefore, if the insure home is a $100,000 home, then there would be $5,000 to level and haul debris when the first limit is hit. I hope this helps. Look into your policy under the additional coverages. All policies have this section. PM me if you need further help. Later.

[HHM]

BK'D BETTY,

Most insurance policies have an additiional coverages section in them that pays for debris removal for this reason. It is over and above the home limit and is usually 5% of coverage A or the limit on the home. Therefore, if the insure home is a $100,000 home, then there would be $5,000 to level and haul debris when the first limit is hit. I hope this helps. Look into your policy under the additional coverages. All policies have this section. PM me if you need further help. Later.

Makes sense to me.

[poorme]

Well, it was worth a try! So our friend Betty is discharged, and the ashy home (or what's left of it) is going though the foreclosure process.

Bank sez - you have a replacement cost policy, so rebuild for us so we get max value that we [U]would[U] have had. Betty is under no obligation to rebuild, and her insurance co. will like making a smaller payout to only cover what the bank is owed on the loan. I still say the land becomes the banks problem at that point. Reason is:

No one gains - there's no equity overage for Betty or anyone else. In a simple bk/fc the owner walks away from the loan clear, and that should be the objective here. Payoff the bank and give them the property - as is. They can easily write-down their payoff to cover the cleanup. What if they took a short sale? They have insurance to cover their 'loss' - same as if they had to fixup/repair the house if they foreclosed on a house needing repairs.

[BK'd-Betty]

Update!

Thanks so much for the replies everyone! I really appreciate it!

Here is an update:

Since I won't be using the replacement cost to re-build. The insurance will pay out (directly to the lender) the value of the property - which is about $20,000 less than what is owed on the Mortgage (the $20,000 is all interest and penalites anyway).

AND (this is the good part), they will be paying out $22,500 to me to remove debris and clean up the property. The property is still mine. I had it appraised and the appraiser says the land alone would list for $138,000. (even though this property is in the NYC Metro Area, I find that incredibly hard to believe, but what do I know about real estate - zilch!)

The Lender has agreed to stop the foreclosure sale once they get a check and I have agreed to pay them the $20,000 balance from the proceeds of the sale of the land.

Only problem is, if I sell the land and receive the proceeds before the one year anniversary of my discharge date and the Trustee finds out about it, he's going to want the proceeds.

Highly doubtful that all the insurance money, clean up, listing the property, and settlement will occur in the next 50 days (the one year anniversary of my discharge).

So, I'm looking good!

PS: The detective handling the case has two suspects and is working to get a warrant for their arrest. He won't tell me who they are yet, but I suspect it 's a couple of neigborhood delinquents.

[HHM]

That sounds pretty good. I figured it would work out something like that.