In law, abandonment refers to the renunciation, relinquishment or giving up of property or rights with the intention of not reclaiming it. Such intentional action may take the form of either discontinuance or a waiver.
Abandonment can actually be beneficial in a Chapter 7 bankruptcy. When the trustee, who oversees and administers an estate, decides to abandon the debtor’s property or asset, it means the trustee is not going to exercise his power to sell it and use the profits to repay the creditors. This generally occurs when the debtor’s properties are encumbered by loans, or when the property doesn’t have much resale value. In either case, the property would not bring in much income, which means that a trustee might decline to force the sale.
If the trustee finds out that there is no sense in selling the debtor’s property, he must file a notice of abandonment to notify the debtor, the court and the creditors. The creditors have the right to object if they believe that the property does have some value. For instance, a creditor might think that the debtor’s home can be sold for more than the mortgage against it.
After repaying the mortgage, there may be some proceeds left over. Creditors can file a motion with the bankruptcy court to prevent the abandonment and compel the trustee to sell the property. A judge would eventually decide whether the trustee could continue the abandonment of the property.
If the trustee decides to abandon the property, the debtor keeps his property even though it is non-exempt (this refers to properties that can be sold by the court, such as real estate, a late-model car with equity, jewelry, investments, etc.).
The trustee may also decide to abandon a property to the lienholder if the lien is greater than the value of the property. For instance, if the debtor has stopped making payments on his home and he has a mortgage of $150,000, but the property’s fair market value is $100,000, then the trustee will typically abandon the property and the creditor can proceed with the foreclosure if the debtor is behind on his payments.
Once the trustee has abandoned a property, if there is a mortgage against that property, the creditor will most likely ask the debtor to “reaffirm” it. If the debtor agrees, he will enter into a new contract with the creditor, agreeing to keep repaying the mortgage on the property.
If the debtor’s property is a home and he doesn’t reaffirm, the creditor can start a foreclosure process. If the debtor is keeping his mortgage payments updated, however, there is a chance that the creditor won’t foreclose, even if the debtor does not reaffirm.
Sometimes, a trustee might abandon a property but forget to issue a notice of abandonment to the creditors. Provided that the debtor listed his property in his bankruptcy petition, abandonment automatically follows once the bankruptcy is finalized and the court has settled his debts. The trustee cannot reopen the debtor’s case to claim his asset and put it on sale once the bankruptcy is over.
If the debtor is not comfortable with this and the status of his bankruptcy is pending, he can file a motion with the court and ask a judge to release an order demanding the trustee to issue the notice. The problem is that the debtor cannot be sure if the trustee has only forgotten to issue the notice, or if the trustee has not yet made up his mind whether to abandon the property. If the trustee hasn’t made up his mind, the debtor’s motion could prompt the trustee to sell the property instead.
The trustee can reverse his decision to abandon a property, even after releasing a notice of abandonment. This generally occurs if the debtor lies in his appeal about something that would affect the value of the property.