Surrendering Secured Property in Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, you must decide how to handle your secured debts—loans that 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 the property that serves as collateral for a secured debt, then you can “surrender” it by giving it back to the creditor. 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—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 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 loan amount. 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. A lien allows a lender to take back 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 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. If you want to give up the property, you can “surrender” it.

(To learn about these options, called reaffirming the debt or redeeming the property, see our Secured Debt & Property in Chapter 7 Bankruptcy area.)

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

You don’t have to return the property to the creditor physically. The creditor must get the property. If the creditor doesn’t retrieve the property, and the trustee doesn’t claim it, you get to keep it. This might 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 have some cash, you can keep the property by “redeeming” it.)
• You think you might not be able to make payments in the future and so don’t want to reaffirm the debt in order to keep the property.

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, without it a creditor can’t collect the debt. However, in some cases, you’ll want to continue a relationship with a lender even though you filed for bankruptcy—especially if you want to keep a car or business equipment that you put up as security for a debt. Because the security agreement survives bankruptcy, you have to return the property if you don’t pay the amount that you owe.

For many people, this can cause a problem. For instance, suppose that 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—called a reaffirmation agreement—with the holder of your auto loan. If both sides agree to the old contract terms—or to newly created conditions—the bank will draft the appropriate document and forward it to you for your signature.

However, it’s necessary to take additional steps to make the contract binding. 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 make the determination 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.)

Disadvantages to Surrendering Property

Here 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 The Bankruptcy Means Test area.)