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 must keep making the payments on whatever is retained. The other option is to surrender the property, meaning the debtor gives it back to the lender who holds the security interest or mortgage.
What it means to retain
The effect of retaining is the same in either Chapter 7 or Chapter 13. The debtor keeps the property, keeps making payments and continues as before. Surrender in Chapter 7 has almost no consequences. The creditor liquidates (sells) the property and the remaining balance owed becomes an unsecured claim handled in the Chapter 7. The creditor is entitled to file a proof of claim for whatever amount remains unpaid after the creditor liquidates the property. Usually that means the creditor gets nothing more beyond what it sold the property for. the debtor. 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.
What it means to surrender
The effect of surrender can be vastly different in Chapter 13. Just as in Chapter 7, in Chapter 13, after the creditor has liquidated the property, it can file a proof of claim. 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 every month can be nearly impossible.
The other problem that surrendering might create is delay in getting a plan confirmed. The 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 a 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 the case until the bank sells the car and files an amended proof of claim. Depending on the lender, this could take months, even longer if it’s a house that is surrendered.
Get professional advice
When it comes to surrendering large items like cars and houses, the advice of an experienced bankruptcy attorney is essential. Sometimes it makes 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.