When you file for Chapter 7 bankruptcy, you must decide how to handle your secured debts. If you don’t want to keep the item of property that serves as collateral for a secured debt, then you can “surrender” it. When you surrender property, you give it back to the creditor and then are cleared of all liability for the secured debt and lien.
Secured Debt and Property in Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, you must decide how to deal with your secured debts and the property that secures those debts.
What Is a Secured Debt? A secured debt has an item of property (often called collateral) that serves as a guarantee for payment of the debt. If you default on the loan, the creditor can repossess (take) the property without first going to court. Examples of secured debt include car loans, mortgages, and loans for household appliances and furniture where the seller keeps a security interest in the property.
What Is Your Liability on a Secured Debt? Your liability is twofold. You are personally liable for the amount of the loan. And the creditor has a lien which attaches to the property. Your bankruptcy discharge will get rid of your personal liability for the debt, but not the lien.
What Happens to Property That Secures a Debt in Chapter 7? If you have equity in the property that is not exempt, the trustee is likely to sell the property to pay your unsecured creditors. If you don’t have nonexempt equity, then you must decide whether you want to keep or give up the property. If you want to keep the property, you have several options which entail either continuing to make payments on the loan or buying the property from the creditor. (To learn about these options, called reaffirming the debt or redeeming the property, see our Secured Debt & Property in Chapter 7 Bankruptcy area.)
If you want to give up the property, you can “surrender” it.
What Does it Mean to Surrender Secured Property?
When you surrender property in Chapter 7 bankruptcy, you essentially give it back to the creditor. This is the simplest method of dealing with secured debt and property in Chapter 7. When you surrender the property, the creditor’s lien is removed. When you get the bankruptcy discharge, your personal liability for the secured loan is wiped out.
How to Surrender Property
If you decide to surrender an item of property in your Chapter 7 bankruptcy case, you will inform the court of your decision in your bankruptcy papers. You don’t have to physically return the property to the creditor. It is the creditor’s obligation to come get the property. If the creditor doesn’t retrieve the property, and the trustee doesn’t claim it, you get to keep it. This may happen if the property isn’t worth much.
When to Surrender Property
Surrendering property can be a good option if:
- You no longer want or need the property.
- You cannot afford payments on the property.
- You owe substantially more on the loan than the property is worth and you don’t have the cash to buy the property at its market value. (If you do have some cash, you can keep the property by “redeeming” it.)
- You think you may not be able to make payments in the future and so don’t want to “reaffirm” the debt in order to keep the property.
Disadvantages to Surrendering Property
There are a few disadvantages to surrendering property.
- You lose the property. This can be a problem, if, for example, you need your car to go to work or attend important doctor’s appointments.
- Some courts won’t count your loan payments on property you intend to surrender for purposes of the means test. This might mean that you won’t qualify for Chapter 7 bankruptcy. Other courts do count these payments when doing means test calculations. (To learn more about the means test, see our Chapter 7 Eligibility & the Means Test area.)