When someone files either Chapter 7 or Chapter 13, she has a choice about secured debt (debt where a creditor can repossess or foreclose on property). The first option is to retain the property, i.e., keep it. That means the debtor has to keep making the payments on whatever is retained. The other option is to surrender the property, or give it back to the lender who holds the security interest or mortgage.
The effect of retaining is pretty much the same in either Chapter 7 or Chapter 13. The debtor keeps the property, keeps making payments and continues as before. The effect of surrender can be vastly different in Chapter 13. The reason is that in Chapter 7, after the property is surrendered, that’s the end of the story for the debtor. The creditor is entitled to file a proof of claim for whatever amount remains unpaid after the creditor liquidates, or disposes of, the property. Usually that means the creditor receives nothing, just like all other unsecured creditors. If there is any distribution made by the Chapter 7 trustee, the creditor gets its pro-rata share along with all other creditors. Either way the debtor isn’t usually impacted.
In Chapter 13, after the creditor has liquidated the property, it can file a proof of claim just like in Chapter 7. But here is where things might get sticky. If the debtor’s plan is what is called a percentage plan, meaning each creditor receives a percentage of its claim, be that 1%, 25% or even 100%, that extra claim (which almost always comes after the claim deadline) can really screw things up. Suppose, for example, the debtor’s plan calls for a 50% return to unsecured creditors. Suppose further that the debtor has a car loan with the local bank and decides to surrender the vehicle. After the bank sells the car, suppose that there is $10,000 left. This isn’t unusual — debtors often have “negative equity” in their vehicles. Now that $10,000 claim filed by the bank means the debtor has to come up with an additional $5,000 over the life of his plan, or another $83 per month in a 60-month plan. When finances are tight, as they always are in Chapter 13, finding an extra $83 ever month can be nearly impossible.
The other problem that surrendering might create is delay in getting your plan confirmed. Your attorney has put together a plan based on the known creditors and their claims. But he has no clue how much of a deficiency the bank might claim after it sells your car. That means he can’t propose a plan with any degree of certainty. The court will have little choice but to continue confirmation of your case until the bank sells the car and files an amended proof of claim. Depending on your lender, this could take months, even longer if you surrender your house.
Think hard about surrendering any big ticket items in Chapter 13. Sometimes it make sense and is the best option, but sometimes it might be the wrong thing to do. If you have questions about your particular situation, please contact us.