Does Surrender Mean Surrender When Filing Bankruptcy During Fla. Residential Foreclosure?

Summary:

Filing Bankruptcy during a Fla. residential foreclosure case? The Eleventh Circuit holds that in a Chapter 7 Bankruptcy, when a debtor decides to surrender the property, that surrender is both a surrender to the trustee as well as to the creditor. Which means, that surrender means surrender . . . to effectively give up the property and give up your right to fight the foreclosure action in state court.

The Eleventh Circuit has Spoken

Since the mortgage foreclosure crisis began almost ten years ago, one of the thorniest issues that Oppenheim Law has always had to address is how does bankruptcy dovetail into a residential foreclosure.  While our firm is not involved in the practice of bankruptcy, we frequently need to try and strategize how and if a bankruptcy may be appropriate during the foreclosure process.  

Recently, however, the United States Court of Appeals for the Eleventh Circuit in In re Failla, finally chimed into the issue of whether or not, when an individual files a Chapter 7 Bankruptcy and surrenders their property, that individual still has a right to assert any counterclaims or defenses in the state court foreclosure.  Previously that was an issue that had never been fully addressed by any court, and thus we had taken the position, along with many other attorneys and bankruptcy judges throughout the country, that a surrender of the property did not necessarily mean that one could not assert any defenses whatsoever.

For example, if one felt that the bank did not have proper standing to bring the foreclosure, to begin with, an individual in a Chapter 7 Bankruptcy could assert that defense in the state court action.  Well, whether we agree or not, the Eleventh Circuit has spoken. Their decision is that when one decides to file a Chapter 7 Bankruptcy and decides to surrender the property, meaning that the bankruptcy court will extinguish the debt and obligation in connection with the property, that surrender is both a surrender to the trustee as well as to the creditor. Which means, (and this is the crazy part, the court went to the Oxford English Dictionary to provide the definition of what the word “surrender” means) that surrender means surrender . . . To effectively give up the property.

Navigating the Foreclosure Action

So now the question is, what does one do if one is going to file for bankruptcy during the foreclosure process?  Well, the answer is simple.  You do not file a Chapter 7 Bankruptcy until you have exhausted all your defenses and counterclaims, and it is only when you have lost the foreclosure case that you would consider filing for a Chapter 7.

In the past people would file for Chapter 7 bankruptcy in the middle of a foreclosure, this would stay the foreclosure action, and then the process would pick up again after the bankruptcy had concluded.  Well, that option is no longer available.

Thus, if you are contemplating going into foreclosure and may, in fact, need to file bankruptcy along the way, we suggest you get competent counsel to advise you as the waters have now changed dramatically in this area of the law.

From the trenches, 

Roy D. Oppenheim