Surrender- Follow up

Posted by Kevin on May 18, 2011 under Bankruptcy Blog | Be the First to Comment

Back in January, 2011, I posted a blog concerning the surrender of a property.  On the petition, the debtor must disclose what it intends to do with certain property.  You can state that you intend to surrender the property to a secured creditor (like your lender).  But, the catch is that the lender does not have to take back the property.

In a recent Chapter 7 case in Maine, HSBC filed a foreclosure action.  The borrower filed a Chapter 7 petition and stated its intention to surrender the property.  HSBC sent a letter to the debtor saying that it was dropping the foreclosure action but stated that the debtor still owed HSBC pursuant to the Loan Agreement.  After two letters from the debtor’s attorney, HSBC acknowledged that the debt was discharged but refused to foreclose and refused to release the mortgage lien without payment.

The debtor filed a lawsuit within the bankruptcy, called an adversary proceeding, saying that HSBC violated the discharge injunction (like automatic stay but after case is closed) by sending the letter.  The debtor asked the court to enter an order forcing HSBC to release the lien.  The court found that the letter violated the discharge injunction, but the refusal to release the lien did not.  The debtor argued that the property was worth less than the mortgage (underwater) and if HSBC wanted payment to release the lien, they were stuck at their house for an indefinite period.  Moreover, they were stuck with the expense of maintaining the property.  The Court said too bad.  “Though the Code provides debtors with a surrender option, it does not force creditors to assume ownership or take possession of collateral.  And although the Code provides a discharge of personal liability for debt, it does ot discharge the ongoing burdens of owning property.”

On a practical level, a bank is only going to walk away from a foreclosure if the property is a real dump and/or the property is significantly underwater.  The problem for debtors is that they assume that because they surrendered, the foreclosure is forthcoming.  In  certain states like California, the foreclosure can happen without a court judgment. The process could be over in a couple of months.  So, in anticipation of getting the boot, the debtor moves out.  Then, the lender states that it is not going through with the foreclosure.   Now, the debtor is locked into a lease, but still must maintain the house including paying the taxes.   Maybe, debtors should not assume.

At any rate, New Jersey is judicial foreclosure state.  That means that the lender must take you to court, get a judgment and then sell.  Currently, that process can take a year.  Under no circumstances should a debtor in New Jersey leave his home because he or  she opted to surrender  in a bankruptcy.  If you are going to be stuck with the duties of ownership, you might as well get the benefits of possession.