Can Debtor Force Lender to Take Back Secured Property?

Debtors often have property they can no longer maintain and that will be foreclosed. Typically, the debtor wants to keep the collateral such as a home or car as long as possible.

But sometimes the debtor really wants to surrender the property back to the lender to avoid potential further liability as an owner. This issue has been litigated, and sometimes the bankruptcy court has held that the lender must either take back the property or surrender its lien. The argument is that the lender is interfering with the debtor’s discharge by failing to accept the property or release the lien. However, this strategy apparently has only worked with motor vehicles with little value, not real estate. And the common underlying property law point is that a lender is not required to take back its collateral.

Why would a real estate owner want to give the property back? As long as the debtor owns the property, the debtor has liability issues. There could be code enforcement issues for failure to maintain the property. There could be ongoing association fees.

Two recent cases followed the common view that the lender does not have to take the property back or release the lien. In re Canning, 442 BR 165(Bankr D. Me Feb. 17, 2011); In re Heck 2011WL 133015(Bankr. N. D. Cal., Jan 13, 2011)

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