Surrending Secured Property in Chapter 7 Bankruptcy

You can return property to the lender and then discharge the secured debt in Chapter 7 bankruptcy.

When you file for Chapter 7 bankruptcy, you must list and briefly describe all of your secured property along with the name and address of each creditor holding a security interest in your property. You must also file a Statement of Intention which tells the court what you intend to do with your secured property. This must be filed within 30 days of filing the petition or on or before the 341(a) Meeting of Creditors (whichever occurs first). 

What Does it Mean to Surrender Property?

You have three options regarding any secured property you hold upon filing. You may either surrender, redeem, or reaffirm the property. If you no longer want to keep the property for any reason, you can surrender it. When you surrender property, you are simply giving it back to the creditor.

What Is Secured Property?

Secured property is any property used as collateral for a loan or debt. The idea behind secured property is that if you stop paying the loan, the creditor can take the property and sell it in order to pay off the debt. Some examples of secured property include: your mortgaged home, your financed vehicles, and certain financed electronics and household appliances which are contractually secured.

Ordinarily, secured property has two liabilities: personal liability and liability on the collateral. Your personal liability extends to any deficiency -- that happens if you cannot pay the debt and the collateral on the debt is not enough to cover the amount owed. If you get a Chapter 7 discharged, your personal liability for the deficiency is wiped out. This means the secured creditor can recover any amount from selling the property, but that's it. The creditor cannot go after you for anything more.

If you surrender your secured property in Chapter 7, you are not responsible for any deficiency amount you still owe on the property after the creditor sells it.

Why Should I Surrender My Property?

Although there are different reasons for surrendering secured property, they mainly have to do with the value of the property. If the value of the secured property is far less than the remaining debt, you may want to surrender the property instead of continuing to pay for property that is worth so little (at least, compared to the debt).

Conversely, if the value of your property is high, you may not want to waste the bulk of your bankruptcy exemptions protecting that single property. (To learn more about how exemptions work, and to find the applicable exemption amounts in your state, see our Bankruptcy Exemptions topic area.)

Even if the value of your secured property is not disproportionate to the debt owed on it, you may want to surrender the property for other reasons. For instance, if you simply can no longer make the payments on it or you do not want the property anymore.

How Do I Surrender My Property?

In order to surrender your secured property, you must notify the creditor of your intention to do so. You do this by filling out the Statement of Intention and marking your choice. A copy of the Statement of Intention is then sent to your creditors, the bankruptcy trustee, and the bankruptcy court so that all relevant parties are aware of your decision.

The creditor then has a specific amount of time within which to pick up or take back control of the property. Usually, the creditor must pick up the property or foreclose on it within 30 days after the first 341(a) Meeting of Creditors. Until the creditor picks up or reclaims the property, you may still be responsible for taking care of it. However, if the creditor fails to take control of the property within the specified time, it is deemed abandoned and you can keep it debt-free.

Pros and Cons of Surrendering Property

Surrendering your secured property has advantages and disadvantages. Below is a list of common pros and cons to surrendering secured property. Weigh then carefully before making your decision.

Pros

  • You get rid of property you can’t afford or don’t want to keep paying for.
  • You are relieved of all debts on the property and all liability arising from any subsequent sale and shortfall on the property.
  • If it isn’t worth the creditor’s time or money to pick up your property, you get to keep it debt-free.

Cons

  • You lose your property.
  • You may not be able to purchase replacement property on credit for a while because of your recent bankruptcy filing.
  • A minority of courts do not let you deduct your past payments on the surrendered property as an expense for purposes of calculating your means test.

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