You Can’t Have Your Cake and Eat It Too: Debtors Who Surrender a Home in Bankruptcy Are Precluded from Challenging the State Court Foreclosure

Chapter 7 bankruptcy debtors are required to declare their intention with regard to property securing a debt when filing their petition.  One of the options is to “surrender” the property.  But what does that mean?  Does the debtor need to immediately move out?  Or may the debtor remain until the foreclosure sale?  This issue was recently addressed by the 11th Circuit in Failla v. CitiBank, N.A., case no. 15-15626 (11th Cir. October 4, 2016).  In Failla, the debtors fell behind on their mortgage prior to their bankruptcy.  The mortgage holder filed a lawsuit in state court.  Before a foreclosure judgment was entered, the debtors filed a Chapter 7 bankruptcy and indicated they intended to “surrender” their home.  However, the debtors continued to live in the home and contested the foreclosure by the mortgage holder in state court.

On appeal, the 11th Circuit analyzed what an election to “surrender” property means under 11 U.S.C. § 521(a)(2).  Utilizing rules of statutory construction, the Court concluded that “surrender” under this provision means that the debtor must surrender the property to both the trustee and the creditor.  The property is first surrendered to the trustee who decides whether to liquidate or abandon it.  If it is abandoned, the property is then surrendered to the creditor.  Further, once the property is surrendered, debtors may no longer oppose a foreclosure in a state court action.  The Court noted, “In bankruptcy, as in life, a person does not get to have his cake and eat it too.”  In other words, debtors may not take one position in bankruptcy court (surrendering the property) and then take another position in state court (contesting the bank’s right to foreclose its mortgage on the surrendered property).

The Court then addressed the bankruptcy court’s order requiring the debtors to cease their defense of the foreclosure action or risk losing their discharge.  The debtors argued that the only remedy available to the Court was granting the creditor relief from the automatic stay to pursue the foreclosure.  The Court rejected that argument, stating “[a] debtor who promises to surrender property in bankruptcy court and then, once his debts are discharged, breaks that promise by opposing a foreclosure action in state court has abused the bankruptcy process.”  Limiting the Court’s remedy to granting stay relief “does nothing to punish debtors who lie to the bankruptcy court about their intent to surrender property.”  The Court noted that creditors may invoke judicial estoppel in state court, however “it does not affect the statutory authority of bankruptcy judges to remedy abuses that occur in their courts.” 

The order compelling the debtors to surrender their home was affirmed.

As a result of this opinion, Florida debtors must be aware that if they elect to surrender their home in bankruptcy in order to obtain a discharge of the personal liability of the debt, they cannot contest a future foreclosure case and must be prepared to move out of the home.

Home Page Photo Credit: Jeremy D'Entremont
Friends of Portsmouth Harbor Lighthouses