By Attorney Stephen Elias
If you have secured debts when you file for Chapter 7 bankruptcy, you must decide what you want to do with the property that secures those debts. If you don’t want or need to keep the property, you can surrender it.
Secured Debts in Chapter 7 Bankruptcy
When you pledge property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and motor vehicles. If you are behind on your payments for a secured det, the creditor can take the property.
A secured debt consists of two parts:
Your personal liability for the debt, which obligates you to pay back the creditor. Bankruptcy wipes out your personal liability for the debt, assuming the debt qualifies for the bankruptcy discharge. This means the creditor cannot later sue you to collect the debt.
The creditor’s legal claim (lien or security interest) on the collateral for the debt. A lien gives the creditor the right to repossess the property or force its sale if you do not pay the debt. If the collateral is unavailable, the lender can sue you for the value of the collateral. A lien sticks with the property even if you give the property to someone else. Bankruptcy, by itself, does not eliminate liens. (However, during bankruptcy, you may be able to take additional steps to eliminate, or at least reduce, liens on collateral for security interests.)
This means that even though bankruptcy wipes out your personal obligation to repay a secured debt, the creditor’s lien on your property survives your bankruptcy case unless the property is returned to the creditor.
Choosing What to Do With Your Secured Property
In Chapter 7 bankruptcy, you must decide what to do with your secured debts and property. If you want to keep the property, some available options include redeeming the property or reaffirming the debt. If you don't want to keep the property, you can surrender it. This article discusses how to surrender collateral, and the pros and cons of this bankruptcy option.
Surrending Collateral in Chapter 7
Surrendering the collateral simply means allowing the creditor to take it back or foreclose on the lien. This is the simplest option for dealing with secured property. It completely frees you from the debt: Giving back the property satisfies the terms of the lien, and the bankruptcy discharges your personal liability for the original debt (and prevents the creditor from seeking a deficiency judgment).
If you surrender property, you might even get to keep it in the end. This happens if the trustee decides not to claim the property after you surrender it, for example, because the property isn't worth much.
Advantages. A quick and easy way to completely rid yourself of a secured debt.
Disadvantages. You lose the property. Also, if you surrender the property, some bankruptcy courts won’t let you use the payments that were due under the contract as deductions for purposes of the means test. (To learn more about the means test, see The Bankruptcy Means Test.) However, other courts let you deduct these payments, reasoning that that the means test is backward looking (that is, it is calculated based on your past expenses) and not concerned with your future intentions.
Restrictions. None. You can surrender any kind of collateral for a secured debt.
When to use it. For property that you don’t need or want or that would cost too much to keep.
How it works. On the Statement of Intention form (which is one of the forms you must file with your packet of papers), check the box indicating that you will surrender the property. You must file the form and send a copy to the secured creditor within 30 days after you file for bankruptcy. It’s then up to the creditor to contact you and arrange a time to pick up the property. If the creditor doesn’t take the property, and the trustee doesn’t claim it, it’s yours to keep. This might happen if the property isn’t worth much. For example, it probably isn’t worth the creditor’s time to pick up, store, and auction off used household furniture or old computer equipment, no matter how much you still owe on it.
Excerpted from How to File for Chapter 7 Bankruptcy, by Attorney Stephen Elias, Albin Renauer, J.D., & Robin Leonard, J.D. (Nolo).