Surrendering Secured Property in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, if you don’t want to keep an item of property that serves as collateral for a secured debt, you can “surrender" it.

By , Attorney · University of the Pacific McGeorge School of Law

When you file for Chapter 7 bankruptcy, you must decide how to handle your "secured debts" or loans you agreed to guarantee with property (collateral). The most common types of secured debts include mortgages and car payments, but other types exist.

If you don't want to keep property serving as collateral for a secured debt when you file for bankruptcy, you can "surrender" it by giving it back to the lender. The bankruptcy case will wipe out your responsibility to pay for the secured debt. If you want to keep the loan in place—and keep the property—you'll need to continue paying the loan. One way to do so is by completing a reaffirmation agreement with the lender.

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 guarantees the debt's payment. 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 loan amount. And the creditor has a lien that attaches to the property. Your bankruptcy discharge will eliminate your personal liability for the debt but not the lien. A lien allows a lender to recover the property if you don't pay as agreed.
  • What Happens to Property That Secures a Debt in Chapter 7? If you have equity in the property that is not exempt, the trustee will likely sell the property to pay your unsecured creditors. If you don't have nonexempt equity, you must decide whether to keep or give up the property. If you want to keep the property, you have several options: either continuing to make payments on the loan or buying the property from the creditor. If you're going to give up the property, you can "surrender" it. Learn more about secured debt in Chapter 7 bankruptcy.

You'll find more about options such as reaffirming the debt or redeeming the property in Secured Debt & Property in Chapter 7 Bankruptcy.

What Does it Mean to File Bankruptcy and Surrender Property?

When you surrender property in Chapter 7 bankruptcy, you return it to the creditor, and it's the simplest method of dealing with secured debt and property in Chapter 7. The bankruptcy discharge wipes out your personal liability for the secured loan. The property lien will no longer exist because the lender will have recovered the property.

Surrendering a House, Car, or Other Property in Chapter 7 Bankruptcy

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'll do so by completing the Statement of Intention for Individuals Filing Under Chapter 7 form.

You don't have to physically return the property to the creditor—the creditor must collect it. If the creditor doesn't retrieve the property and the trustee doesn't claim it, you keep it. The likelihood of this happening is higher when the property isn't worth much.

When to Consider Surrendering Property in Bankruptcy

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 it at its market value. (If you have some cash, you can keep the property by "redeeming" it.)
  • You might be unable to make payments in the future and don't want to reaffirm the debt to keep the property.

Find out more about surrendering a car in Chapter 7 bankruptcy.

Disadvantages of Surrendering Property in Chapter 7

The most obvious disadvantage to surrendering property is you lose the property. Surrendering might not be an option if you need your car to go to work or attend important doctor's appointments.

A less obvious disadvantage to surrendering property is that some courts won't count your loan payments on property you intend to surrender for purposes of the means test. Because secured payments reduce your available disposable income for qualification purposes, you might have difficulty qualifying for Chapter 7 bankruptcy.

Learn more about the bankruptcy means test.

Keeping Property With a Reaffirmation Agreement

Bankruptcy works by severing contracts with your creditors. Because your obligation to pay a debt stems from a valid contract, a creditor can't collect the debt without it. However, in some cases, you'll want to continue paying a lender to keep the financed property.

For instance, suppose you're making payments on a vehicle. If you have another form of transportation, losing the car you're buying on credit might not be an issue. But if you need the car to get to work or to take your children to school, then losing it might not be an option.

To get around this problem, you can enter into a new contract—a reaffirmation agreement—with the holder of your auto loan. If both sides agree to the old contract terms or newly created conditions, the bank will draft a reaffirmation agreement and forward it to you for your signature. After you sign, it will be filed with the bankruptcy court.

However, taking additional steps to make the contract binding is necessary. Specifically, you must demonstrate that you can afford the monthly car payment. If represented, your lawyer can attest that the payment will not pose an undue hardship for you (and your family) by signing the reaffirmation form and filing it with the court. Otherwise, the judge will determine at a hearing.

Once the reaffirmation agreement is approved, you'll be legally liable to pay the debt balance. As long as you remain current on your payment, you can retain the property without fear that the lender will repossess it.

Learn more in Reaffirming Secured Debt in Chapter 7 Bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has made the law easy for over fifty years? It's true—and we want to ensure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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