Client Alert: Federal Appeals Court Rules That Bankrupt Debtors’ Choice to "Surrender" Real Property Waives Their Right to Contest Foreclosure

Under Section 521(a)(2)(A) of the federal bankruptcy code, a debtor in a chapter 7 bankruptcy must file a statement within 30 days of the bankruptcy filing notifying the court, creditors and the trustee whether the debtor intends to retain or surrender property encumbered by a mortgage.  In its October, 2016 decision in the case of In re Failla, the 11th Circuit Court of Appeals, in affirming rulings from the bankruptcy court and the federal district court, held that once a chapter 7 debtor elects to "surrender" mortgaged property, he is precluded from thereafter opposing the efforts of the lender to foreclose its mortgage on such property.  In its opinion, the court of appeals noted that while the bankruptcy code does not define the word "surrender," the context in which that term is used in the bankruptcy code together with dictionary definitions of the word reflect Congressional intent that it means "giving up a right or claim" as to the surrendered property—not just delivering the property itself.  The court held that debtors "who surrender property must get out of the creditor’s way" and ruled also that the bankruptcy court was permitted to order the debtors to withdraw their affirmative defenses and dismiss their counterclaims in the foreclosure case.

Foreclosure delay tactics have long included a bankruptcy filing to impose the automatic stay.  The requirement of filing a statement of intention as to retention or surrender of secured property now puts the debtor in a quandary.  An election to retain mortgaged property requires the debtor to pay off the mortgage by redemption or reaffirm the debt—something that is not usually feasible particularly if foreclosure has commenced.  As a result, many debtors elected to "surrender" the property which, until recently, merely resulted in a lifting of the automatic stay and the resumption of sometimes protracted foreclosure litigation.  However, several bankruptcy courts in Florida have addressed this issue in the last couple of years by prohibiting a debtor from defending a foreclosure and state courts have begun to follow this reasoning as well.  The decision in Failla solidifies this trend.

In a related vein, chapter 13 cases also provide for a debtor to surrender mortgaged property in their chapter 13 plan.  While Failla involved a chapter 7 case, the definition of surrender utilized by the court should apply equally to preclude a debtor in a chapter 13 case from surrendering mortgaged property in their chapter 13 plan and then opposing the bank’s foreclosure efforts.

For more information on loan enforcement and creditor’s rights in state court and bankruptcy court, please contact Mark D. Hildreth at