Consumer Bankruptcy Committee

ABI Committee News

Can't Get No...Satisfaction*

Due to the recent downturn in the real estate market, chapter 13 debtors are fabricating new tools to surrender their real estate. While surrendering a secured asset is not a novel concept in the Bankruptcy Code,[1] one new “tool” being utilized is attempting to surrender real property with excess mortgage debt in full satisfaction of the mortgage. Unfortunately for debtors, this tool is as effective as using a plastic hammer on a railroad spike. Modern case law trends suggest that, much like the surrender-in-satisfaction provisions for personal property, chapter 13 debtors may not surrender real property that is in full satisfaction of their mortgage debt.[2]

In a recent Florida case, a debtor had filed for chapter 13 bankruptcy, indicating that she wanted to surrender her property in full satisfaction of the second lienholder’s claim.[3] Section 1325(a)(5) of the Code allows a debtor to either retain collateral or surrender collateral to the creditor who holds a lien over that collateral.[4] Unfortunately, that Code section is silent when the surrender of the collateral will result in a deficiency balance on the creditor’s claim. In Hughes, the court looked to §506(a)(1) for guidance.[5] In that section, the Code clearly provides that “an allowed claim of a creditor secured by a lien in property in which the estate has an interest…is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property…and is an unsecured claim to the extent that the value of such creditor’s interest is less than the amount of such allowed claim.”[6] In rendering its decision, the court in Hughes looked to Associates Commercial Corp. v. Rash.[7] In that case, the Supreme Court ruled that in such instances where collateral is underwater, the secured creditor’s claim “is to be divided into secured and unsecured portions, with the secured portion of the claim limited to the value of the collateral.”[8] The court in Hughes ruled that a debtor may not surrender his or her real estate in full satisfaction of the mortgage debt.[9] Therefore, in using the guidance provided from Hughes, since the debtor will be unsuccessful in surrendering real property in full satisfaction of mortgage debt, a creditor will be allowed to file an unsecured deficiency claim under 11 U.S.C. §506(a)(1).[10]

Florida is not the only state that has dealt with this issue. Recently, the Eastern District of Michigan has taken up a case on very similar facts.[11] In that case, the debtor filed for chapter 13 bankruptcy, whereby she proposed to surrender her real estate in full satisfaction of her obligation to the mortgage creditor.[12] The primary difference in this case, from the Hughes decision, is that the debtor in this case only had one mortgage on her residence.[13] The debtor in the Michigan case represented to the court that the property was worth $100,000 with the value of the note being $203,236.24.[14] The debtor proposed to surrender the property to the mortgage creditor in full satisfaction of the outstanding balance to the mortgage creditor.[15] As the court pointed out, “only two courts have directly addressed the issue of whether 11 U.S.C. §506(a) applies when a debtor surrenders property that is not a debtor’s principal residence. Both cases held that the secured creditor was entitled to an allowed general unsecured claim for any deficiency balance pursuant to §506(a)(1).”[16] Therefore, the court had an important analysis to undertake. The debtor argued that since the property was not her principal residence, she should be able to modify the claim under §1322(b)(2) and surrender in full satisfaction.[17] The mortgage creditor argued that it had a right to bifurcation of the claim after surrender.[18] The court ruled that “there is no meaningful distinction, for purposes of determining the secured status of a creditor’s claim, between the surrender of real property and the surrender of a vehicle.”[19] The debtor’s request to surrender her real property in full satisfaction of the mortgage creditor’s claim was denied.

Notwithstanding recent attempts by debtors to modify or rid their estates of mortgage debt over and above market value of their real property, two courts have decided the issue in favor of the mortgage creditor. Where these decisions fall in the grand scheme of things remains unseen; however, it is more than likely that other courts facing the surrender-in-full satisfaction issue may consider these two decisions and continue the trend of disallowing debtors from surrendering property in full satisfaction of the mortgage debt. What should be alarming for debtors considering this issue is that the courts are ruling in this manner despite the value of the property being substantially less than the value of the note. For now, one rule is evident: Debtors seeking to surrender their houses in full satisfaction of their mortgage debt “can’t get no satisfaction.”

* Article title adapted from the Rolling Stones' hit "Satisfaction."


1. 11 U.S.C. §1325(a)(5)(c).

2. See In re Finley, 408 B.R. 111, 114 (E.D. Mich. 2009) (stating that there is no meaningful distinction, for purposes of determining secured status of creditor’s claim, between surrender of real property and surrender of vehicle).

3. In re Hughes, 402 B.R. 404, 405 (M.D. Fla. 2008).

4. See id. at 406.

5. Id.

6. 11 U.S.C. §506(a)(1).

7. See Hughes, 402 B.R. at 406.

8. 520 U.S. 953, 961 (1997).

9. Hughes, 402 B.R. at 407.

10. See Hughes, 402 B.R. at 407.

11. See Finley, 408 B.R. 111.

12. See Finley, 408 B.R. at 112.

13. See id. See also Hughes, 402 B.R. 404.

14. See Finley, 408 B.R. at 112.

15. See id.

16. See id. at 113 (citing In re Hughes, 402 B.R. 404, and In re Brooks, 2009 W.L. 1490486 (Bankr. M.D. Fla. 2009)).

17. See Finley, 408 B.R. at 112.

18. See id.

19. See id. at 114.