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Court Rules Bankrupt Debtor Who ‘Surrenders’ Home Cannot Challenge Foreclosure

by | Mar 13, 2017 | Bankruptcy

A recent US Court of Appeals case held that a debtor who files of statement of intention to surrender mortgaged property in bankruptcy court cannot still oppose the creditor’s foreclosure of the property in state court.  David Failla, et al. v. Citibank NA, Case No. 15-15626 (11th Cir. 2016).  The case, arising out of Florida, involved a homeowner who defaulted on his mortgage, triggering a foreclosure action by his bank.  The homeowner then filed for bankruptcy which halted the foreclosure action.  In filing for bankruptcy, a debtor must file a “statement of intention” about what he plans to do with the collateral for his debts.  The statement of intention must declare one of four things: the collateral is exempt, the debtor will surrender the collateral, the debtor will redeem the collateral, or the debtor will reaffirm the debt.  In this case, the debtor filed a statement of intention that he would surrender the property.  Because the value of the property was less than the balance of the mortgage, the bankruptcy trustee abandoned its interest in the property and the bankruptcy court granted the debtor a discharge of debts.

The homeowner thereafter continued to live in the home.  The bank restarted its foreclosure action to complete the transfer of title from the homeowner back to the bank.  The homeowner objected to the foreclosure proceedings in court, arguing that his surrender of the property to the bankruptcy trustee in the bankruptcy case did not equate to a surrender of the property to the bank in the foreclosure case.  The 11th Circuit Court of Appeals disagreed, siding with the bank.  The Court ruled: “Debtors who surrender property must get out of the creditor’s way” and can no longer challenge the bank’s foreclosure.  While a statement of intention filed in a bankruptcy proceeding does not obviate the need for the bank to complete its foreclosure, it should remove roadblocks from the process, including preventing the debtor from delaying or hindering the foreclosure proceedings.  For more information regarding this case, or to contact a Wisconsin banking attorney, please contact Attorney Andrew Bosshard at Bosshard | Parke Ltd.