Discharge Injunction Violation: Can A Lender Refuse To Foreclose, Release Its Lien, Or Accept Surrender Of A Property?

After filing a chapter 7 bankruptcy, the debtors tried to surrender their residence to the mortgage lender. After the bankruptcy the lender refused to accept a surrender, refused to foreclose and refused to release its lien. The debtors brought an adversary proceeding claiming that, among other things, this refusal constituted a violation of the discharge injunction they received in bankruptcy. The bankruptcy court found no violation; the Bankruptcy Appellate Panel agreed; and on appeal the 1st Circuit affirmed - but with some cautionary comments.

All parties agreed that the mortgage loan was substantially underwater. The loan had a balance of ~$186,000, while initially the debtors valued the property at $130,000 and the lender valued it at $86,000. Although a foreclosure proceeding was pending at the time the bankruptcy was filed, the lender voluntarily dismissed the foreclosure without prejudice based on the bankruptcy.

The debtors received a discharge under Section 727 of the Bankruptcy Code, which means that they were discharged from all prepetition debts, including the mortgage loan. Under Section 524(a) of the Bankruptcy Code a discharge "operates as an injunction against the commencement or...