Can I legally force a lender to take my house back by surrendering it in a chapter 7 bankruptcy?
9 June 2014
Answer: As a general rule, no, but under the right circumstances and depending on the actions of the lender, there could be a possibility.
Many consumers mistakenly believe that their mortgage lender will automatically take their home if they simply stop paying. Although it is by far the most likely result, there are times when a lender opts to not pursue foreclosure. When this happens, the consumer remains responsible for all the incidents of home ownership.
In an effort to rid themselves of property, some consumers file bankruptcy and opt to “surrender” their homes, this being one of the three options to choose from in bankruptcy for each secured debt a debtor has. Even utilizing the power of chapter 7 bankruptcy (chapter 13 is a separate subject) it is important to understand that the lender is not forced to foreclose, even when the consumer desires this. The consumers/debtors in In re Canning, a decision issued by the First Circuit (which includes Massachusetts), learned this. Canning v. Beneficial Maine, Inc. (In re Canning), 706 F. 3d 64 (1st Cir. 2013).
To understand the In re Canning case and this subject matter, one must first understand what the effect of a chapter 7 discharge has on a secured loan. It relieves the debtor from personal liability, but the lien against the property survives. This means that the bank cannot sue the debtor for any deficiency that remains after the property is foreclosed on, but again, it retains its right to foreclose against the property if applicable. 11 U.S.C. § 524(a); Pratt v. General Motors Acceptance Corp. (In re Pratt), 462 F.3d 14, 17-18 (1st Cir. 2006).
In In re Canningthe debtors opted to surrender their home in a chapter 7 bankruptcy. Canning v. Beneficial Maine, Inc. (In re Canning), 706 F. 3d 64, 66 (1st Cir. 2013). After the case was over, the Cannings wrote to their mortgage lender and gave it two options: 1) foreclose; or 2) release its lien. Id. at 67. The bank refused to do either, instead it made clear it was not seeking to collect the debt personally against the debtors, but only retained its lien to enforce its right against the property. Id. It also said that it would consider a short sale or a negotiated settlement. Id. This eventually meant to the First Circuit that the bank was not seeking to collect more than the value of the house, even though the mortgage amount owed was much more than that.
The Cannings eventually reopened their bankruptcy case and sought sanctions against the bank for failing to foreclose or release its lien. Canning v. Beneficial Maine, Inc. (In re Canning), 706 F. 3d 64, 66 (1st Cir. 2013). The Cannings relied on a case named In re Pratt, also decided by the First Circuit. Id. at 68. In In re Pratt an auto lender was found to have violated the discharge injunction by failing to repossess or release its title to a worthless car. Pratt v. General Motors Acceptance Corp. (In re Pratt), 462 F.3d 14 (1st Cir. 2006). The court found that the auto lender was using its right to repossess improperly and coercing the debtor into making payments. Id. at 19-20. In other words the court found that the auto lender was in reality seeking to collect personally against the debtor, which as stated, is prohibited after someone gets their discharge in bankruptcy. Part of the reason was that the debtor was unable, due to state law, to junk the car because the junk yard required all liens were released. Since the auto lender refused, the debtors were stuck with the car seemingly indefinitely. This is part of why the court believed the position the auto lender put the debtors was untenable and improper and amounted to coercion to get them to pay the debt.
But in In re Canning, the court saw what the bank was doing was different and permitted. Canning v. Beneficial Maine, Inc. (In re Canning), 706 F. 3d 64, 71 (1st Cir. 2013). A few reasons was that the property at issue, a residential home, had value, and also was subject to value increase. Id. at 72. It also noted that the Cannings failed to show that they were incurring expenses by holding onto a worthless asset, as the debtors in In re Prattdid. Id. at 71. All in all, it appeared that the Cannings were relying on the decision issued in In re Pratt without appreciating the differences in the two situations.
There are many lessons that can be learned by In re Canning, but one is that there is no guarantee you will be able to shed ownership of a secured asset in bankruptcy. Another may be that if you seek to rely on a court decision in your case, to pay close attention to the reasoning that supports it and think hard about whether those same reasons exist in your situation. Finally, it may be to appreciate the commitment home ownership is.
There is much more to this subject matter and every consumer should seek the best counsel they can. In the event that you are facing foreclosure or a possible bankruptcy and want to try for the best outcome, feel free to contact us.