Surrender of real property in Chapter 13

Posted by Kevin on January 13, 2011 under Bankruptcy Blog | Be the First to Comment

I was called as a witness in a foreclosure case.  The issue, however, dealt with a surrender of a condominium in a Chapter 13.  In the Ch 13 Plan official form, a debtor can either continue paying a secured lender (mortgage holder) every month outside the plan and pay the arrearages through the plan; modify the claim by, for example, changing the interest rate; or surrendering the property.

But what does “surrender” mean?  Well, to the dismay of many landowners, it does not mean that the lender becomes the owner of the property upon surrender.   What has happened many times is that a debtor moves out of the house that he no longer can afford.  He expects the lender to take over.  But the lender does not take over the property.  The debtor may file papers with the bankruptcy court to force the lender to take over the property.  But, absent unusual circumstances, the debtor loses this application.

Surrender means that the lender will eventually take over control of the property.  To do that in New Jersey, the lender would be required to foreclose and take the property at a sheriff’s sale.  In the meanwhile, the debtor is still the owner, and is resp0nsible for payments of insurance, upkeep of the property, homeowner association fees and the like.  In fact, there are cases where the owner was fined by the municipality for failure to mow the loan.

On the other hand, if the condo is rented out and the lender does not have an assignment of rents, the debtor gets to keep the rent until the foreclosure sale.

What happened in my case?   Well, we argued that even though the debtor surrendered the property, he had a right to participate in the foreclosure, and even bring predatory defenses to the foreclosure action.  This would reduce the amount due on the mortgage and perhaps reduce the payments due under the plan.    The Judge wants to hear more testimony before he makes a decision.

Stay tuned.