What Happens If I Surrender My House in Chapter 7 Bankruptcy?

If you don't want, or cannot afford, to keep your home, you can surrender it in Chapter 7 bankruptcy.

By , Attorney

If you don't want to keep your house when you file for Chapter 7 bankruptcy, you can surrender it (give it back) to the lender. Read on to learn what to expect when surrendering your house in Chapter 7 bankruptcy.

How to Surrender Your House in Chapter 7

When you complete your bankruptcy paperwork, you'll tell the court and your creditors whether you intend to keep or give back any property serving as collateral for a debt, such as your house (if you have a mortgage or other lien on the property) or car (if you're paying an auto loan). These types of debt are known as "secured debt" because the collateral helps ensure payment of the loan.

When you agree to put up your home as collateral for the mortgage, you give your lender a lien (a type of ownership interest) on your house. If you don't pay your mortgage, the lender can enforce the lien by foreclosing on the house. The lender will then sell the house at auction and use the proceeds to pay down the home loan.

You'll indicate that you want to surrender the house when you fill out the official bankruptcy form Statement of Intention for Individuals Filing Under Chapter 7. On it, you'll list the creditor's name and address and the home address, and then you'll check the box marked "Surrender the property."

(For more details, see Completing the Statement of Intention for Individuals Filing for Chapter 7.)

Reasons to Surrender Your House in Chapter 7

Below, we discuss some of the most common reasons you may wish to surrender your house in Chapter 7 bankruptcy.

  • You can't afford the mortgage payment. For many people, this is the primary reason they choose to surrender their house.
  • Your mortgage balance is more than what the house is worth. If your mortgage balance is substantially greater than the value of your home, it may not be worth keeping. Many debtors decide that they can move to a comparable place and pay less. If you are upside down on your house, Chapter 7 provides a simple way to walk away from it. Keep in mind, however, that in some cases, you can eliminate a junior mortgage in Chapter 13 bankruptcy.
  • You don't want to keep the house. People have both personal and financial reasons for wanting to surrender a house. However, if you have equity in the home, consider selling it yourself to realize the maximum amount of profit instead of surrendering it. Otherwise, the Chapter 7 trustee might sell your house, give you the portion you're entitled to receive under the homestead exemption, and pay your creditors with the remaining proceeds. If the trustee doesn't sell it, the lender will auction it off in a foreclosure sale to the highest bidder.

Chapter 7 Wipes Out Mortgage Debt

Chapter 7 bankruptcy will discharge any mortgage debt associated with the property. Specifically, you won't be responsible for any portion of the home loan when you surrender the house.

If the bank foreclosed on the property before you filed Chapter 7 and sold it at auction for less than what you owe, you likely still owe the remaining balance, called a deficiency balance. (Keep in mind that the law of some states doesn't allow for deficiency balances.) Your mortgage lender can come after you to collect a deficiency balance, so you might be facing a lawsuit even after the lender foreclosed on your house.

A Chapter 7 bankruptcy discharge will wipe out an obligation to pay back a mortgage deficiency. As a result, after bankruptcy, you'll be free of any mortgage-related liability.

(For more information regarding your house in bankruptcy, see Your Home in Chapter 7 Bankruptcy).

Chapter 13 Bankruptcy Offers Mortgage Solutions

If you're behind on your mortgage payments and want to keep your house, filing for Chapter 13 bankruptcy might be a better option. In Chapter 13, you can keep the house if you have enough income to make your monthly payment while catching up on the mortgage arrears. You'll typically have up to five years to catch up on the back payments.

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