January 20, 2020

Property Surrendered in Chapter 7 – Will I Owe if There is a Deficiency?

What happens when you surrender real estate in a bankruptcy?  What does it mean for the trustee to "abandon interest" in the property.  And most importantly, are you – the debtor – responsible for any deficiency balance that may arise after the case is over and the property sold?

This question was posed to me by Christina, one of my recent Chapter 7 clients.  Because of a loss of income, Christina had surrendered back to the mortgage lender a home that she valued at $350,000.   She estimated that the debt owed to the first and second lender totaled $375,000.

Recently, Christina has been receiving letters from the trustee and the second mortgage lender and she is unsure about what this all means.  Most importantly, she is concerned that she may end up with personal liability if the foreclosure sale of the property results in a shortfall.  Because this question raises issues that can apply in a wide range of situations, I decided to answer it on my blog.

First, Christina needs to understand that by surrendering her property, she is relieved of all liability arising from any subsequent sale and shortfall.  By surrendering the property, the debt to the mortgage lenders becomes an unsecured debt which is dischargeable in the Chapter 7.  I should note that Christina's mortgage lenders, like any other creditor in her case, do have the right to file a challenge to her bankruptcy if they suspect fraud or other wrongdoing by Christina. 

I have seen challenges to bankruptcy discharges in cases of mortgage fraud but, absent some unusual bad faith circumstance, it is very unlikely that any credit would file a challenge.  In Christina's case the deadline for filing challenges has long past so she is in the clear.

So, the brief answer to her question – she will not owe any money to the trustee or to either the first or second mortgage lender.

Now, let's take a look at what is going on behind the scenes and why Christina is getting all of those letters.

When Christina filed her Chapter 7, her filing triggered a basic bankruptcy protection called the "automatic stay."  This "stay" means that all creditor actions, including foreclosure, repossession, wage garnishments, etc. must stop immediately.   Christina's bankruptcy filing also triggered the creation of a bankruptcy estate, administered by a Chapter 7 trustee.  The trustee's job is to investigate Christina's financial picture to see if there are any assets to liquidate.

Although Christina filed a Statement of Intention providing for a surrender of the property, the creditor did not get it back because the Chapter 7 trustee had to perform his own investigation to see if there was any equity.  Further, the automatic stay remained in effect while the trustee was performing his investigation.

It is interesting to note that the trustee's investigation has just concluded (August, 2006) although this case was filed in October, 2005.  The reason for the delay – the huge backlog of cases filed prior to the October 17, 2005 change in the bankruptcy law.  The mortgage creditors in this case have been sitting for almost a year without any payments waiting for the trustee to finish his investigation – no wonder they are not very happy!

On August 1, 2006, the trustee filed his Notice of Abandonment.  This means that the trustee has concluded that thereis no equity for the estate.

Now that the trustee has abandoned any claim to equity in the property the mortgage company will move for relief from the bankruptcy stay and will proceed with foreclosure.  Even if the foreclosure results in a deficiency in favor of either the first or second lender, Christina will not owe anything – her obligation is discharged.

[tags] Chapter 7, bankruptcy, mortgage deficiency, motion for relief from stay, automatic stay, Chapter 7 trustee, Notice of Abandonment, surrender of property [/tags] 

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.


  1. Hello Jonathan, I have a related question. Like Christina, Warren has recently surrendered multiple properties in his Chapter 7 bankruptcy case. He was involved in severe mortgage fraud and lost a few properties to foreclosure prior to filing his case, as well. He is now receiving bills for unpaid utilities and taxes. He has not included these debts in his Chapter 7 bankruptcy case. What is the best solution for this particular issue? Thank you, Neena

  2. I listed a real estate properly (a secondary residence) that is in foreclosure in my Chapter 7 petition schedules, including a statement of intention to surrender the property, however, I missed the 45-day deadline to mail my notice of intention to surrender a real estate property to a mortgage holder. The petition was filed on Nov 15, 2010, and the creditors hearing was held 45 days later on Dec 30, 2010. Apparently, the notice of intention was supposed to have been filed within 30 days of the petition, by Dec 15, 2010. So now, I’m 26 days late, having mistakenly thought the clerk’s notice was sufficient. The case won’t be closed for another 60 to 90 days.

    I know the missed deadline eliminates the protection of the automatic stay, but is there is still a way to surrender the property to get the deficiency (approximately $70,000 in this case) discharged to prevent any future deficiency action?

  3. I have surrendered my rental property in a chapter 7 bankruptcy. I called the automated number for the bankruptcy court in california and it states the bankryptcy was discharged on 5/20/2014 and the case was closed on 5/20/2014. What happens next? During the bankruptcy the bank did not request a stay.

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