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Chapter 7 BK Statement of Intention to Surrender — What about a Change of Mind?

Posted By USFN, Thursday, April 9, 2015
Updated: Wednesday, September 23, 2015

April 9, 2015 


by Charles Pullium and Tom Holmes
Millsap & Singer, LLC – USFN Member (Missouri)

When a debtor files a chapter 7 petition, bankruptcy law requires that the debtor state his intention to surrender, reaffirm, or redeem property in which a creditor has a secured interest. This statement of intention must be filed within 30 days of the filing of the bankruptcy petition, or on or before the date of the meeting of creditors, whichever is earlier. Bankruptcy law also provides that the debtor must perform his intention within 30 days from the first date set for the meeting of creditors. 11 U.S.C. § 521.

So, what happens if the debtor expresses his intention to surrender a property in his statement of intention, but changes his mind at a later date? Unless the debtor sought and received an extension of time to amend the statement, he may be stuck. A bankruptcy court in Florida recently held this to be the case. See In re Failla, S.D. Florida, 11-34324. In that case the debtors, who defaulted on their note and mortgage, filed a chapter 7 bankruptcy petition along with their statement of intention in which they declared their intention to surrender the property. The debtors’ schedules properly listed the property and the secured lien, and the debtors did not dispute the debt. The debtors then sought to amend their statement of intention to declare an intention to reaffirm the debt. However, the amendment was untimely and did not result in a valid amendment of the original statement.

Four months after the filing of the bankruptcy petition, the debtors received their discharge. When the mortgage creditor resumed foreclosure activity, the debtors actively opposed the action in the state court. The mortgage creditor then went back to the bankruptcy court and sought an order from the court compelling the debtors to surrender the property pursuant to the statement of intention. The bankruptcy court found the creditor’s argument to be persuasive and ordered the debtors to surrender the property. In doing so, the court posed and answered a number of interesting questions.

First, what must a debtor do, or not do, to perform his intention to surrender? There are generally two views: (1) the debtor must take affirmative action to actually turn over the property; or, (2) which is the more common opinion, the debtor cannot take action to impede the lawful course that would normally be pursued in state court by a secured creditor. This is to say that a debtor may not actively defend or contest a foreclosure in a state court if the debtor previously admitted the validity of the debt and stated an intention to surrender the property in a bankruptcy case that resulted in the debtor’s discharge.

Second, to whom must the debtor surrender the property? The debtors in the Failla case cite a single case in support of their position that the property should be surrendered to the bankruptcy trustee. In re Kasper, 309 B.R. 82, 85-86 (Bankr. D.D.C. 2004). The debtors contend that they did surrender the property to the trustee, who then abandoned the property as an asset of the estate, thereby reverting the property interest back to the debtors upon the trustee’s abandonment.

However, the majority opinion, and the one that the court takes in the Failla case, is that the property must be surrendered to the secured lienholder. The Eleventh Circuit Court of Appeals stated that, “Allowing a debtor to retain property without reaffirming or redeeming gives the debtor not a “fresh start” but a “head start” since the debtor effectively converts his secured obligation from recourse to nonrecourse with no downside risk for failing to maintain or insure the lender’s collateral. Section 521 mandates that a debtor who intends to retain secured property must specify an intention to redeem or reaffirm.” In re Taylor, 3 F.3d at 1516.

A debtor, who persists in his refusal to surrender the property by actively defending a foreclosure suit in this type of situation, may be putting his discharge in jeopardy or, as the Failla case suggests, committing fraud. The refusal to surrender also constitutes a violation of 11 U.S.C. § 521(a)(2), which requires a debtor to perform his intention with respect to such property within 30 days after the meeting of creditors.

The relevance of a debtor’s past bankruptcy case cannot be overlooked when litigating a foreclosure or other subsequent, related matter. A debtor may be precluded from taking inconsistent positions in related matters and may be bound to perform a prior intention.

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