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Surrendering Collateral In A Chapter 7 Case Forfeits The Right To Oppose Foreclosure

Recently, the Eleventh Circuit held against Chapter 7 Debtors who attempted to renege on their stated intention to surrender their residence in their Chapter 7 bankruptcy case. Individuals who file Chapter 7 bankruptcy petitions must complete a Statement of Intention for Individuals Filing Under Chapter 7. The purpose of a "Statement of Intention" is to inform creditors, the court, and the Chapter 7 trustee of a debtor's intentions relating to property that serves as collateral for a secured debt, or is the subject matter of an unexpired personal property lease. Debtors may claim as exempt, reaffirm, redeem or surrender any property that falls within the aforementioned categories.

In Failla v. Citibank, N.A. (In re Failla), 2016 WL 5750666 (11th Cir. Oct. 4, 2016), A married couple filed a Chapter 7 bankruptcy case and, in their “statement of intention,” declared that they would surrender their house, which was subject to a mortgage held by Citibank. Because the Faillas were underwater on their house, their bankruptcy trustee “abandoned” the property. However, when Citibank attempted to foreclose, the Faillas opposed it, which resulted in Citibank filing a motion to compel the Faillas to surrender the property. The bankruptcy court granted Citibank's motion, and its ruling was affirmed by the district court.

The Faillas main argument centered around the fact that they only intended to surrender the house to their trustee, and specifically not to Citibank. Further, they argued that the only remedy available to Citibank was to lift the automatic stay to foreclose. Both of these arguments failed.

The court held that “[t]he text and the context of [§ 521(a)(2)] compel” an interpretation encompassing surrender to the creditor as well as to the bank. If “surrender” meant only surrender to the trustee, then there would be no need for § 521(a)(2) at all, in light of § 521(a)(4)’s provision that “[t]he debtor shall . . . surrender to the trustee all property of the estate.”

The Faillas also argued that to “surrender” the property meant only that they would physically relinquish the property. However, the court pointed out that the Bankruptcy Code uses the word “deliver” to mean a physical relinquishment, while to “surrender” property means relinquishing a right or claim. The court went on to say, “debtors who surrender their property can no longer contest a foreclosure action. . . . Debtors who surrender property must get out of the creditor’s way.” The court also rejected the argument that the bankruptcy court had no authority to enter an order compelling the Faillas to surrender the property, but could only lift the automatic stay for Citibank.

At Loan Lawyers, our South Florida consumer rights and debt defense attorneys help individuals with problems related to the payment of their mortgage. If you are facing foreclosure and require assistance with this and loss mitigation, contact our office today by calling (888) FIGHT-13 (344-4813) and see how we can help.