After Surrendering in Bankruptcy, Contesting Foreclosure is not Allowed

Oftentimes, a debtor files a bankruptcy petition that will stay a pending foreclosure. Should the debtor seek relief under Chapter 7, all property of the debtor becomes property of the bankruptcy estate and subject to disposition by the Chapter 7 trustee, with court approval. Should the Chapter 7 trustee determine that there is no equity in the mortgaged premises, he/she will “abandon” the property, and title will then revert back to the debtor. The debtor must then either pay the secured debt, or “surrender” the property to the secured creditor in satisfaction of, at least, the secured portion of the debt.

Similarly, should the petition be filed under Chapter 13, the debtor may “surrender” the mortgaged premises in lieu of including the obligation to pay the debt secured thereby in the bankruptcy plan. In either instance, by “surrendering” his/her property, the debtor relinquishes any rights he previously had in the property, in exchange for being relieved of the obligation to remit “post-petition” mortgage payments. Once the foreclosure is resumed, however, to the chagrin of the mortgage holder, some debtors engage in protracted litigation, intended to hinder and delay the foreclosure proceedings, while residing “rent free” in the premises!

In re: David A. Failla, 529 B.R. 786 (2014) was such a case. David and Donna Failla owned a house in Boca Raton, Florida, encumbered by a $500,000 mortgage. The mortgage holder commenced a foreclosure action, which was opposed by the Faillas, who then jointly filed a Chapter 7 bankruptcy petition, in which they admitted that they owned their house, their mortgage was valid and that the balance of their mortgage exceeded the value of the house.

Since the house had no equity, the trustee abandoned it in accordance with 11 USC Section 554, and the Faillas filed a “Statement of Intention” to surrender the house in accordance with 11 USC Section 521(A)(2). Nonetheless, when the plaintiff was allowed to resume the foreclosure proceedings, the Faillas continued to litigate and defend the foreclosure, causing substantial delay to the foreclosure process, while they occupied the house “rent free”.

When the lender sought relief from the bankruptcy court, it ordered the Failas to formally surrender the premises and to stop opposing the foreclosure action. On appeal, the 11th Circuit Court of Appeals upheld the bankruptcy court’s decision, ruling that under Section 521(A)(2) the surrender of property required the debtor to acquiesce to a creditor’s foreclosure and that by opposing the foreclosure, the Faillas were violating this section!

In other words, when a debtor surrenders his/her property in a bankruptcy proceeding, he/she gives up the right to contest the foreclosure. You simply can’t have your cake and eat it too! Once you “surrender” your property, it is no longer yours and so you have no interest or “standing” to contest the foreclosure.

For questions or comments, please contact me at peter.roach@roachlawfirm.com.

Peter Roach

Peter T. Roach & Associates, P.C.

peter.roach@roachlawfirm.com