Bankruptcy & the Underwater Home: A Case for Real Property Redemption

Abstract

Chapter 7 of the U.S. Bankruptcy Code exists to satisfy the claims of creditors and preserve an economic “fresh start” for the debtor after bankruptcy. In exchange for surrendering her property to the trustee to have it monetized (i.e., sold), the debtor receives a discharge of her debts and an injunction against future creditor in personam actions to recover them. However, the in personam injunction is insufficient to protect consumer debtors who are in default on mortgages encumbering underwater homes because the creditor’s in rem rights remain; after the conclusion of the case, the creditor can continue foreclosure proceedings, which result in eviction and often homelessness. The economic, educational, and health externalities of foreclosure and homelessness are detrimental to individuals and harmful to society at large. The Bankruptcy Code already possesses the tool to prevent these harms without disadvantaging creditors—the right to redeem under § 722—but currently restricts redemption to personal property. This Note argues for a statutory amendment to § 722 that extends the right of redemption to real property.