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Bar News - July 20, 2016

Federal Practice & Bankruptcy: Chapter 7 Bankruptcy Surrender: Don’t Give Your Home Away


Some debtors facing foreclosure file bankruptcy to take advantage of the automatic stay to stop the foreclosure sale. The automatic stay acts as an injunction, or bar, against any attempts by creditors to collect debts or enforce liens. The automatic stay is triggered the moment the bankruptcy is filed, instantly halting the foreclosure sale. Stopping the foreclosure sale allows the borrower a little breathing room to make decisions about the disposition of their property, which may include applying for a loan modification or pursuing a short sale.

As part of a bankruptcy petition, the debtor must list the foreclosing entity as a secured creditor and has the option of listing the mortgage debt as “disputed.” Every Chapter 7 debtor must also file a Statement of Intention regarding his or her secured debts. 11 USC 521(a)(2)(A). In the First Circuit, the debtor must choose one of three options with respect to his secured property: 1) reaffirm the debt; 2) redeem the debt or 3) surrender the property. Bank of Boston v. Burr (In re Burr) (1st Cir. 1998).

There are critical considerations and potential legal ramifications if the debtor chooses to “surrender” his home in a bankruptcy case. The term “surrender” is not specifically defined in the Bankruptcy Code, and there is a split of authority as to whether a debtor who states his intent to “surrender” his home should be precluded from asserting state law claims to defend a post-bankruptcy foreclosure action.

Courts in the First Circuit have applied the language defining “surrender” to support the proposition that a Chapter 7 debtor who states an intent to surrender his home is precluded from asserting state law claims to defend a post-bankruptcy foreclosure action. Citing principles of judicial estoppel, these decisions hold that a debtor cannot challenge a foreclosure post-bankruptcy, after previously stating an intention to surrender the property. The underlying rationale is that the Chapter 7 debtor “surrenders” the property to the creditor and “surrendering” the property means to cede all possessory rights.

However, not all courts agree on this issue. Recently, the US Bankruptcy Court in the Southern District of Florida held that surrender of real property in a statement of intention does not estop the debtor from asserting foreclosure defenses post-bankruptcy. In re Elkouby, (February 29, 2016). The Elkouby court held that, reading Section 521 as a whole, the Chapter 7 debtor’s statement to surrender property is best understood to mean a surrender to the Chapter 7 trustee, not the lienholder.

If the Chapter 7 trustee does not liquidate the property during the bankruptcy case, and the creditor does not seek relief from the automatic stay, the property is deemed “abandoned” to the debtor when the bankruptcy case closes. The effect of “abandonment” is that title and right to the debtor’s home reverts to its pre-bankruptcy status.

The Elkouby holding is consistent with the First Circuit’s definition of “surrender” in the context of defining the creditor’s responsibilities post-bankruptcy, as they relate to the bankruptcy discharge order, when a debtor states an intention to surrender property in a bankruptcy case. The issue before the Canning Court, Beneficial Me. Inc. (In re Canning), (1st Cir., 2013), was whether the creditor violated the discharge order by failing to foreclose on the debtor’s former residence when the debtor’s stated intention was to surrender the home. In this context, the First Circuit held that by stating an intention to surrender their home, the debtor agrees to make the collateral available to the secured creditor, which may, if it so chooses, exercise its preexisting property rights as to the collateral.

To surrender real property in a Chapter 7 bankruptcy case does not require nor mandate the creditor to take possession of the property. In fact, before the creditor can exercise its contractual right to foreclose while the bankruptcy case is pending, it must first obtain relief from the automatic stay. In situations where the creditor does not want the property, the debtor retains possession and ownership, notwithstanding a stated intention to surrender in the bankruptcy case. In other words, a Chapter 7 debtor’s stated intent to surrender property in a bankruptcy case does not, in and of itself, alter the contractual relationship and obligations between the parties or their rights under state law.

As a general matter, most bankruptcy practitioners treat the Statement of Intention in a Chapter 7 bankruptcy case as a document that identifies a present intention, with no post-bankruptcy legal effect. It is not uncommon for a debtor to file Chapter 7 bankruptcy to discharge their unsecured debt with the goal of addressing mortgage problems separate from the bankruptcy case. The absence of a statutory definition of surrender in the Bankruptcy Code has resulted in a body of case law, including in New Hampshire, which holds a statement of intent that surrenders real property in a bankruptcy case precludes a Chapter 7 debtor from asserting defenses in a post-bankruptcy foreclosure action. Bankruptcy practitioners are well-advised to ensure that the Statement of Intention filed by their Chapter 7 clients reflects the clients’ true intention regarding their homes.

Krista Atwater

Mary Stewart

Mary Stewart of Mary Stewart Law and Krista Atwater of Atwater Law have contracted with the NHBA Legal Services Department to assist attorneys participating in the Foreclosure Relief Project.

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