In many Chapter 7 and 13 cases, our clients decide to maximize the benefits of their "fresh start" by surrendering to the lender all of their "rights, title and interest" in an "underwater" residence or rental property or a property with predatory loan terms. In Georgia, these properties usually are secured by a security deed (Deed To Secure Debt) the client has given to the lender to secure the collection of the loan. In "better" times with fewer foreclosures and a stronger housing market, when property was surrendered in bankruptcy, a lender routinely would file a motion with the Bankruptcy Court to be allowed to foreclose and advertise the property and sell it "on the courthouse steps". This process divested the client of title and, after foreclosure, there was a new owner with all of the obligations of ownership.
Now, with more foreclosures and a soft housing market, to quote singer-songwriter Bob Dylan: "The Times They Are A-Changin". In most cases, the property is still sold at foreclosure. In a recent bankruptcy case in Georgia, involving BAC Home Loan Servicing, the lender did not foreclose. What happens? Under the security deed in use in Georgia, the lender holds legal title but only for the collection of the loan. The client is the equitable owner of the property with all of the perks and all of the obligations of ownership.
Picture this scenario: after the lender filed its motion in the Georgia bankruptcy case, the client, anticipating foreclosure, moved out months ago. If no one is mowing the grass or maintaining the property, until there is a change in ownership, the client may be at risk for county or local housing code violations and multiple fines. If a Homeowners Association is in the picture, the client gets no relief from post-filing dues and assessments until there is a change in ownership!
The bottom line: Based on the recent Georgia bankruptcy case and cases decided elsewhere, the Bankruptcy Judges are deciding that nothing in the Bankruptcy Code requires that a lender be ordered to foreclose on surrendered property. In the Georgia case, Judge Barrett stated that the client "is not divested of his ownership obligations until the actual foreclosure occurs or until the lender takes affirmative steps of ownership".