Surrender Not an Option for Homeowners in Bankruptcy

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By Stephanie Cumings

Nov. 24 — A debtor who misses mortgage payments in bankruptcy can't surrender his home to make up for it, even if the creditor goes three years without bringing the missed payments to the court's attention.

Courts are split on whether or not a debtor can unilaterally choose to surrender their home in satisfaction of the debt during the pendency of the bankruptcy plan when they initially agreed to keep the home and make payments. Some courts argue this isn't a permissible “modification” of the plan under the Bankruptcy Code.

Judge Stacey G.C. Jernigan agreed with this approach, but expressed “utter amazement” that the creditor failed to report the missed payments for nearly three years, and suggested that this inaction may have led to an unfair result.

Missed Mortgage Payments

Under a Chapter 13 bankruptcy plan, debtors can retain their homes and other property by making regular payments as directed by the plan. The debtors in this case agreed to make certain plan payments to the bankruptcy trustee, but also agreed to make mortgage payments directly to Ocwen Loan Servicing LLC. While they made all of the required plan payments, they missed several of the mortgage payments.

Despite this, Ocwen didn't complain to the court until the debtors had finished their plan payments and were seeking a discharge from bankruptcy.

Plan Payments Defined

The debtors argued they should receive a discharge because they completed all of their plan payments, and Section 1328(a) of the Bankruptcy Code provides that a discharge shall be granted “after completion by the debtor of all payments under the plan.” The trustee argued that “payments under the plan” includes the missing mortgage payments.

The court agreed with the trustee and held that this phrase does encompass any payments to be paid directly to secured creditors under the terms of the plan.

‘Technically, Partially Correct.'

However, the Bankruptcy Code also says, under Section 1329(a), that the plan can be modified any time after it is confirmed, “but before completion of payments under such plan.” The debtors argued they should be allowed to modify their plan and surrender their home to Ocwen in satisfaction of the debt. They claimed it wasn't too late to modify the plan precisely because they had yet to complete the payments according to the court.

The court said that while this may be “technically, partially correct,” the argument fails for a number of reasons. First of all, Section 1329 lists ways that a plan can be modified, but the court noted that the word “surrender” is “conspicuously absent.”

Courts Are Split

Next, the court acknowledged that courts are split on whether a plan can be modified to surrender property. In Chrysler Fin. Corp. v. Nolan (In re Nolan), 232 F.3d 528 (6th Cir. 2000), a case involving the surrender of a vehicle, the Sixth Circuit found that surrender isn't an option and relied primarily on the fact that Section 1329 doesn't mention surrender as an option.

“While the court did focus extensively on the literal wording of the statute, it seems somewhat noteworthy that the court also focused on the inherent unfairness of a debtor promising payments based on the value of a vehicle at the outset of the case, the vehicle depreciating after use, and then passing the car off to the lender after the decline in value,” the bankruptcy court in this case said. “But to be clear, the Sixth Circuit concluded that debtors can never modify a plan under [S]ection 1329(a) of the Bankruptcy Code by surrendering collateral and having a deficiency treated as an unsecured claim.”

Cars vs. Homes

Many courts have adopted this approach, but as the court noted, most of those cases also concern vehicles and discuss the inequitable result when a vehicle depreciates in value. But as the court in this case noted, “residential real property is less likely to depreciate during a case and may even appreciate to the lender's benefit.”

No circuit court has addressed this issue with regard to homes, according to research conducted by Bloomberg BNA. The court ultimately found that it had to abide by the clear language in the statute, which didn't explicitly permit surrender, even if the result was inequitable.

‘Mental Gymnastics.'

Other courts have found that plans can potentially be modified to surrender collateral, including courts that sit in the Fifth Circuit, where the Texas bankruptcy court in this case also sits. But the court in this case criticized this line of cases as requiring “mental gymnastics” in order to justify the use of surrender.

The court also noted that homes have special protections under the Bankruptcy Code. Section 1322 says that a bankruptcy plan can't modify the rights of a holder of a secured claim in the debtor's home. In this case, because the 60-month plan period had ended, if Ocwen was forced to accept surrender, it wouldn't have a chance to filed an unsecured deficiency claim in the bankruptcy, which would be an impermissible modification of its rights.

‘Utter Amazement.'

Finally, the court expressed “utter amazement” that Ocwen had failed to act sooner in this case. The court said that once it noticed the missing payments, Ocwen could have moved for permission from the bankruptcy court to foreclose on the house. After foreclosure, Ocwen could have filed a deficiency claim for any money it couldn't recover at foreclosure.

In that case, the debtors could have permissibly modified the plan to account for the fact that Ocwen got the bulk of its money outside the plan. The court noted that in this scenario, the creditor is proactively seeking a remedy (foreclosure) rather than having one forced upon it via surrender. Therefore, the court ultimately concluded it must deny the debtors a discharge.

“While this result is unfortunate and somewhat awkward (considering that it may have been avoided had Ocwen been more proactive in the [d]ebtors' [b]ankruptcy [c]ase—something over which the [d]ebtor had no control), the reality is that the [d]ebtors simply waited too long to address the issue with the court,” the court said. “Thus, there is no mechanism, at this point, for the [d]ebtors to receive their [C]hapter 13 discharge.”

Gwendolyn E. Hunt of Desoto, Texas, represented the debtors.

Ocwen was represented by Chelsea Schneider of Mackie Wolf Zientz & Mann, P.C., Dallas.

Thomas Powers of Irving, Texas, acted as the bankruptcy trustee in this case.

To contact the reporter on this story: Stephanie Cumings in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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