What To Do When the Bank Won’t Foreclose After Bankruptcy

by Gary on October 8, 2012

As the saying goes, you can lead a horse to water, but you can’t make it drink. More and more debtors are finding that they have filed a Chapter 7 or Chapter 13 bankruptcy, intending to surrender a house they no longer live in, only to find that the mortgage company waits months, even years, before foreclosing on the property. In the mean time, debtors do not know what to do about the property.

Debtors can mark “surrender” of the property in the statement of intentions.  They can agree to stay relief if the creditor files a motion for relief from stay.  But nothing in the Bankruptcy Code forces creditors to foreclose on property.  State laws, too, generally do not force a mortgage creditor to foreclose on property that has been surrendered in bankruptcy.  So, it goes without saying that this can often be a very frustrating issue for attorneys and their consumer debtor clients alike.

Why?  As almost anyone who has practiced in the area of consumer bankruptcy will tell you, when banks don’t foreclose, homeowners’ associations get feisty.  City code compliance officers issue citations for failure to maintain the property (high grass, broken windows, etc.).  Debtors get nasty-grams in the mail from their former HOAs and even-nastier civil fines (which could turn into criminal liability if unpaid) from local governmental agencies.  Not to mention the overall harm to the neighborhood caused by a property falling into a state of disrepair.

Can anything be done? A bankruptcy judge suggested at a recent Continuing Legal Education event that it may be possible to use a motion for relief from stay as a springboard to negotiating an agreement with the mortgage servicer to go ahead and foreclose within a set time frame.  The thrust of this strategy is that a court must find “cause” to lift the stay under 11 U.S.C. 362(d)(1), and if the creditor has no intention of actually foreclosing, then what cause do they have to obtain stay relief?  While this is by no means a sure bet, it at least offers debtors’ counsel some leverage to help ensure the outcome their clients are seeking – transfer of title to the surrendered property out of their name, and an end to their relationship with their former mortgage servicer.

Indeed, the more consumer debtors’ attorneys who insist on language in an agreed order requiring foreclosure of the security interest in the surrendered property as a condition of stay relief, the more likely it is that courts and creditors will come to accept this as standard procedure.  If it works, this approach will certainly help prevent lots of headaches for debtors and their attorneys!

If you need help with consumer bankruptcy or your mortgage, please contact the attorneys at Armstrong Kellett Bartholow P.C.

Leave a Comment

Previous post:

Next post: