How difficult it can be to surrender real property in bankruptcy when you have no hope of paying for it.
After all, the lender takes a mortgage on the property so they can take it from you if you don’t pay.
My client’s bankruptcy plan said he would make no payments on the rental’s mortgage and would surrender it to the lender.
More than two years later, the lender refused to do anything to take back the property. The property ran up bills and became run down.
And still the lender did nothing.
So I reacted as most good attorneys do: I sued.
And, it seems, won.
All this in a fight that my client was willing to lose from the beginning.
Here’s the story.
Debtor proposed surrender
My client owned two out-of-state rental properties when he filed Chapter 13. His plan told one and all that he did not propose to cure the mortgage defaults on the properties.
Rather, the plan said he would surrender them. They were vacant and remained vacant throughout.
One lender held a foreclosure sale and the title to the property was transferred to the bank.
But inexplicably, two and a half years into the Chapter 13, the second lender had not even started foreclosure.
Meanwhile, the municipality where the property was located issued notices of code violations for failure to maintain the property. As the owner of the property, my client was liable for complying with local law. Fines and other penalties loomed.
And, as a property owner, he had legal liability for any injury that occurred on the property. So, self preservation required that he keep liability insurance on the property as long as he owned it. There’s an expense he could do without.
You can’t rely on the lender’s insurance
He offered to deed the property to the lender. Not interested, said the lender.
Bankruptcy judge transfers title
I filed suit in bankruptcy court against the indifferent lender. The suit alleged that the lender frustrated by confirmed plan by not taking the property back.
Alternatively, I asked the court to void the lien of the lender who seemingly didn’t care to exercise its rights in the collateral. If it were lien-free, the debtor could donate it to a good cause.
I asked for damages for my client and attorneys fees.
Amazingly, the lender did not appear in the case or respond in any way to the complaint.
The judge entered judgment, transferring title from client to bank.
Victory! I guess….
Why borrowers should push this envelop
Bankruptcy “reform” passed in 2005 required debtors to file one more form among their bankruptcy papers, one stating their intentions with respect to property that is collateral for a debt.
The flaw in the law is that the debtor’s intention doesn’t effect a transfer of the property, and providing for surrender doesn’t make a legal difference in who owns the property.
Thus you hear debtors announce that they surrendered property in their bankruptcy case, but nothing seems to have changed.
In addition to the responsibilities of a property owner for compliance with local law and the exposure to suit by individuals injured on the property, bankruptcy reform created a new trap for the reluctant owner of property: HOA dues.
Section 523 of the Bankruptcy Code acquired a new provision in 2005 which made non dischargeable any home owner association dues or like fees that come due after the filing of a bankruptcy case. The “meter” on HOA dues continues to run as an enforceable, personal liability of the debtor for so long as the debtor has title or possession of the unit.
So, until title passes to someone else, the debtor is going back into debt each month that passes without payment of the HOA dues, even though he announced his intention to surrender the property.
It’s different if you live in the property you’re surrendering
My client’s experience was made easier by the fact that he was a debtor in a Chapter 13. A confirmed plan bound all creditors and a court had continuing jurisdiction to hear the complaint we brought and order title to the property transferred. Neither plan nor continuing jurisdiction exist in Chapter 7.
Once again, Chapter 13 serves a client well. And we succeeded in losing this property.