When you file bankruptcy and have debts secured by collateral such as houses, cars furniture or jewelry, you must decide if you are going to find a way to pay for the collateral or simply “surrender” the property to the creditor. In a Chapter 7, you must either surrender, redeem or keep the payments current on secured debts like a mortgage or a car loan. In a Chapter 13, you still must pay for the collateral, although the amount you pay can vary depending on when you borrowed the money and the value of the collateral.
Instead of paying for the collateral, another option is to surrender the property. This means you are saying you are not going to pay the debt nor will you try to prevent the creditor from taking the property back. Just saying you surrender does not mean you do not have and own the property until the lender actually takes steps to take the property by foreclosure or repossession. By surrendering the secured collateral, the lender takes the property, sells its, applies the money to the balance owed and the difference becomes unsecured debt.
Sometimes people can get too attached to objects like a house or a car and consider paying too much to keep them. Oftentimes my clients will explain their house is not just a house but a home where they have raised their children that they just could not bear to lose. I always discuss with them that a home is where the heart is, not in a building. Frequently it is the problems created by a house or car because of payments too high to afford that led to the need for bankruptcy in the first place. At which point, bankruptcy can solve the symptoms of the problem, debt in other areas.
However, if the problem was really a mortgage or car payment that was too high or too far upside down, then a bankruptcy may not solve the problem unless the property is surrendered. Keep in mind that sometimes a Chapter 13 can result in a lower payment that can be afforded, but sometimes 13s will start out trying to keep a home only to later wisely decide to surrender the home or car because they just cannot afford it.
At the end of the day, the decision to surrender or not is up to the Debtor, but we will help you consider and make these hard decisions to help get the full benefit of your fresh start in bankruptcy.
By William P. Turner, W M Law Attorney
