Generally, when a filer in Arkansas or elsewhere designates in the bankruptcy petition that the residential real estate will be surrendered, it’s an indication that no fight will be put up when the mortgage holder brings a foreclosure action. In some cases, in fact, the foreclosure has already occurred prior to the filing of the bankruptcy and the bank has already taken possession. However, where the filer has defaulted on the loan and does not agree to surrender the property in the bankruptcy papers, what are the rights of the respective parties?
The first answer is that “it’s complicated.” Depending on the precise facts at hand, there could be several diverse rulings. In one case in another state, the filer claimed that she would reaffirm the mortgage debt rather than surrender the property. During and after the bankruptcy, however, she apparently did nothing to reaffirm the debt and start paying again.
The mortgage holder brought a post-bankruptcy foreclosure action in state court. However, the homeowner defended it and raised certain cognizable defenses. The bank, instead of fighting those issues through to a final determination, came back into the Bankruptcy Court with a motion to reopen the case. The bank wanted the court to order the woman to surrender the home and give up the state court foreclosure defense.
The bankruptcy judge ruled that it would be “unconstitutional, inequitable and unjust” to force the homeowner to stop fighting the state foreclosure action. The decision appears to be reasonable enough that it would be applied also in Arkansas. However, some courts will, under certain facts, rule that the intention to surrender property in bankruptcy is enforceable. The matter remains generally controversial and in need of clarification from the appellate courts before the dust will settle. The case discussed above, however, is probably good law in holding that it is legally insupportable to try and reopen a closed bankruptcy case to force a surrender instead of confronting the contested issues in a state court foreclosure proceeding.
Source: dailybusinessreview.com, “Bankruptcy Judge Sides With Owner on Home Surrender“, Samantha Joseph, Aug. 24, 2015