- November 25, 2015
- Thomas Adam
Bankruptcy and foreclosure are in some ways very different. The former involves primarily federal law, seeks to assist the debtor, and involves all of a debtors assets and liabilities. Foreclosure in contrast involves primarily state law, seeks to assist the creditor in securing the rights to the collateral property, and involves only the debtors home.
Despite these differences, the two areas of law overlap at points, in part because many debtors filing for bankruptcy have property that is tied up in the foreclosure process or at risk of foreclosure. Earlier this year, a the Middle District of Florida in in re Metzler joined other circuit courts in holding that “[a]t a minimum, “surrender” under Bankruptcy Code §§ 521 and 1325 means a debtor cannot take an overt act that impedes a secured creditor from foreclosing its interest in secured property.” Let’s dig look at what that actually means…
“Surrender” Under the Bankruptcy Code
“Surrender” of property is an option for debtors under both Chapter 7 and Chapter 13. In Chapter 7 (11 USC § 521), debtors are required to file a “statement of intention” as to all secured property indicating whether they will redeem the property, reaffirm the debt, or “surrender” the property. Similarly, under Chapter 13 (11 USC § 1325) the debtors proposed re-organization plan must state how they will address the property. Their options are to obtain the consent of the creditor, “cram down” the debt, or “surrender” their property.
Although the result is similar, there is a key difference between “surrender” under the bankruptcy code and foreclosure. Unlike foreclosure, surrender in bankruptcy prohibits the creditor from later pursuing a claim against the homeowner for a deficiency judgment. A deficiency occurs when the value of the home at the time the lender takes title and possession is less than the remaining balance due on the mortgage loan. Although they don’t always choose to pursue the option, lenders can typically sue the homeowner for the difference between the remaining balance and the value of the home.
The Metzler Cases
The Metzler case was actually a decision on two bankruptcy cases that dealt with the same issue. In the first, the homeowner Lisa Metzler, had been sued for foreclosure. She subsequently instituted a Chapter 13 bankruptcy case and proposed the surrender of her home. The court accepted her proposal. After the acceptance, Metzler continued to defend the state foreclosure case. Doesn’t sound like surrender, does it? Metzler argued it was, that all “surrender” meant was that the lender could pursue its foreclosure claims without violating the automatic stay that would otherwise prevent such action.
The second case, was a little more complicated. There the homeowner, Nootan Patel, filed for Chapter 7 bankruptcy but did not list a home on it. That home was secured by a mortgage. Because the home wasn’t even listed, Patel didn’t file the required statement of intentions indicating how she intended to proceed with respect to the property. Although it may seem like Ms. Patel was trying to deceive the bankruptcy court and hide the home, it turns out, she simply didn’t know she still owned it. She thought that it was now owned by her former husband. Patel received a bankruptcy discharge. Without Patel’s knowledge, an attorney began defending the foreclosure action. Not happy with this, the lender requested that the court reopen the bankruptcy case and require that Patel surrender the property.
The Court’s Decision
To make a long story a little shorter, the court found that to surrender in bankruptcy means the same as it does in every day usage: to give up or stop fighting. (dictionary definition of surrender: “cease resistance to an enemy or opponent and submit to their authority”) The debtor does not need to “deliver” the property to the lender, but they do need to avoid taking “an overt act,” like defending a foreclosure lawsuit to prevent the lender from foreclosing on the secured property. Under this definition, both Metzler and Patel failed to surrender their properties.
Your Bankruptcy or Foreclosure
Navigating the bankruptcy and foreclosure waters can be tricky, the Jacksonville bankruptcy attorneys and foreclosure defense lawyers at Adam Law Group can help you avoid mis-steps when facing foreclosure or filing for bankruptcy.