Surrendering Real Property

A question that has come up a few times recently is a variation of "how do I surrender my house in bankruptcy?"  When someone files bankruptcy, she can surrender any property that secures a debt.  To "surrender" means to turn the property over to the secured creditor and walk away, receiving a discharge for whatever is owed above the value of the property surrendered.  This often happens when the debtor owes more on the loan that the property is worth (a condition known as being "under water").  With personal property, such as cars, boats, home furnishings, electronics, etc., surrender is usually a matter of giving the items to the bank.

A house or any real estate is more difficult.  You can't just drop it off at the bank.  Even sending the bank the keys to the house isn't good enough because title to the real estate is still in your name in the county recorder's office.  If you're still the owner, you could be liable if someone slips and falls on the property.  You will be liable for unpaid property taxes and assessments, and you could be fined for not maintaining the property, such as by shoveling the snow in winter or mowing the lawn in the summer.

Some people have tried signing a quitclaim deed and recording it.  That might work, but there is a concept in real estate law that requires a deed to be accepted to be valid.  Acceptance means the grantee (the bank in this case) willingly takes the deed.  Simply recording the deed may not be valid acceptance.

As banks become overwhelmed with properties that are under water, many of them simply don't know what to do.  As a result, they might not start and complete foreclosure in a timely manner.  This leaves the surrendering borrower in limbo.  She has said she doesn't want the property, but she can't get rid of it.  The only solution might be to file a motion with the bankruptcy court to force the creditor to accept a deed, thereby getting it out of the debtor's name.  The worst thing to do is ignore the situation.

Surrendering a House

In bankruptcy a debtor has three options when it comes to secured debt (debt where the creditor has collateral that can be repossessed): Surrender (give the collateral back), reaffirm (renew the contract, essentially excepting the debt from the bankruptcy), or redeem (paying the creditor a lump sum equal to the value of the collateral -- not a realistic option for obvious reasons).  To surrender means you give back the collateral and walk away from the debt, not owing any deficiency that may exist after the creditor sells the collateral.  With a car or any other personal property, surrender is fairly easy.  Drive the car to the bank, drop the keys on the manager's desk and walk away.  It's a bit more tricky with a house.  How do you give a house back?

The issue is becoming more and more important because of the backlog of foreclosures.  In years past, as soon as a person filed bankruptcy the bank filed a motion for relief from the automatic stay to get permissioin to foreclose.  Now, banks are waiting several months to act, if they act at all.  While this might seem like a great deal for the debtor because she gets to live in the house rent-free until the bank acts. there are some big downsides. If your bankruptcy schedules say you're going to surrender something, you are required to surrender within 45 days of the meeting of creditors.  For a house, this means, at the very least, to leave and notify the bank that the property is vacant. But this doesn't solve everything. As long as the debtor still has legal title, she is considered the owner.  That means if someone is hurt on the property (such as by slipping and falling on the ice), the debtor could be responsible.  If there are dues, such as condominium fees, the debtor could be personally responsible.  Same goes for assessments made by the city. If these things happen after you have filed (post-petition), the debts are not discharged by the bankruptcy. 

If you plan to surrender your house in bankruptcy. talk to your attorney about how you actually accomplish that.