Surrendering Property in Bankruptcy

One of the most common issues a bankruptcy debtor must decide early on in their case is whether or not to try and keep a piece of property or to surrender that property back to the creditor in satisfaction of the debt.  There can be a myriad of reasons why a debtor chooses to surrender a piece of property in their bankruptcy case but a recent opinion by Judge Williamson in the Middle District of Florida makes the surrender decision even more important.  That is because in In re Metzler Judge Williamson held that when a debtor surrenders a piece of property during bankruptcy they are barred from taking any actions to defend or stop the foreclosure proceeding in the state court. In re Metzler, 530 B.R. 894, 900 (Bankr. M.D. Fla. 2015).

            This is a very important development in the Middle District of Florida.  Now, when a debtor is considering the surrender of real property they must be committed to their ultimate decision because there is no going back.  Under Metzler, debtors in the Middle District of Florida cannot take any “overt actions”, i.e. defending a foreclosure case, that would prevent the secured creditor from foreclosing on the property and transferring title.

             The Metzler opinion actually involved two bankruptcy cases, one a Chapter 7 and the other a Chapter 13.  A Chapter 7 debtor has three options regarding their secured property: redeem the property, reaffirm the debt the property secures, or surrender the property.  Under Bankruptcy Code § 521 all Chapter 7 debtors are required to file a statement of intent within 30 days of filing the case which tells the court which option the debtor has chosen.  Chapter 13 debtors are not required to file a statement of intent but instead are required to file a plan of reorganization which indicates how the debtor proposes to treat the secured property.  Bankruptcy Code § 1325 gives the Chapter 13 debtors three options for treating the secured debt: gain the secured creditor’s consent to the plan, cram down the plan treatment over the secured creditor’s objection, or surrender the property.

            Both debtors in Metzler took explicit acts to prevent the respective secured creditors from foreclosing their mortgages by actively defending the foreclosure cases after stating their intent to surrender the properties during bankruptcy.  Metzler argued that surrender in bankruptcy actually just dissolved the automatic stay but did not have any effect on her state law rights.  But the court held differently when it stated that “Surrender means something.  In the context of Bankruptcy Code §§ 521 and 1325, the Court concludes the term means that a bankruptcy debtor must relinquish secured property and make it available to the secured creditor by refraining from taking any overt act that impedes a secured creditor’s ability to foreclose its interest in the secured property.” In re Metzler, 530 B.R. 894, 900 (Bankr. M.D. Fla. 2015).  In light of this decision, all potential Chapter 7 and Chapter 13 debtors need to be 100% positive regarding their decision to surrender a piece of property before informing the court of their intent.  All prospective debtors should create a plan of intent for each secured debt and corresponding asset with their bankruptcy counsel before filing their case.

By:  Joshua B. Dawes, Attorney at The Law Offices of Jason A. Burgess, LLC

If you have questions about this or anything else please give us a call at 904-354-5065 or email us at jason@jasonAburgess.com 

The Magic Behind the Confirmation Order in Chapter 11

The Magic Behind the Confirmation Order in Chapter 11

The goal of any Chapter 11 bankruptcy case, whether individual or business is simple: get the plan confirmed. The process of negotiating with creditors, making personal budgets, and filling out those pesky monthly operating reports all have the end goal of making a Plan of Reorganization that is fair, reasonable, and most importantly, feasible for the client to complete. But what effect does the confirmation order actually have on the case? What does this mystical magical confirmation order allow to happen if the Debtor defaults? These answers sometimes, are not so clear, even to attorneys.  

The confirmation order is the crucial point in the bankruptcy case when plan payments begin, and all the agreements between the debtor and creditors start over. The Chapter 11 Plan creates a new contractual relationship between the debtor and creditor, and the treatment that is provided for in the plan are the new terms. In re Winn-Dixie Stores, Inc. 414 B.R. 764 (M.D. Fla. 2009). The agreement the creditor and debtor had before the confirmation is erased, and the new agreement is controls.

With this in mind, there are really three ways that a debtor default can be dealt with: 1) the case can be re-opened and dismissed; 2) the case can be converted to a Chapter 7 liquidation case; or 3) the contract can be litigated in state court. Generally, courts are reluctant to re-open cases. Good cause must be shown, and usually pretty compelling circumstances have to exist for a court to allow a case to be re-opened. There are two ways cases can be converted, voluntarily or involuntarily. The bankruptcy code, under 11 U.S.C. §1112(b) allows creditors to request that the case be converted if certain circumstances exist, some of which include material default with respect to a confirmed plan, inability to effectuate a plan of reorganization, failure to file tax returns or pay post petition taxes, among several others. It is important to note that with both conversion and dismissal, the court looks at the best interest of the creditors, not the debtors, and creditors are not afraid to pursue these avenues when a debtor has not made plan payments.

The third option relies on the fact that a new contract is created between the creditor and debtor. Because the Chapter 11 plan and subsequent confirmation create a brand new contract, creditors can absolutely pursue action in state court. This means that foreclosure actions can commence, default judgments can be entered, and the creditor can pursue all legal remedies they were prevented from pursuing while the debtor was protected by the bankruptcy.

Bankruptcy is a long and often difficult process, and is not entered into lightly. A lot of debtors come to us and choose chapter 11 to protect themselves from foreclosures, or liquidating. While the primary goal of any chapter 11 is to get the case confirmed, there is no point to confirmation if the debtor defaults. The moral of the story is to make sure the plan proposed is feasible for the debtor, and that the debtor makes plan payments so that the event of a default is not even a concern.

By:  Samantha Marriott, Attorney at The Law Offices of Jason A. Burgess, LLC

If you have questions about this or anything else please give us a call at 904-354-5065 or email us at jason@jasonAburgess.com