If you have secured debt and you’re filing a Chapter 13 bankruptcy plan, it’s important to understand what it means to “surrender” property.
Treatment of Secured Creditors in Chapter 13
A secured claim is a claim in which the creditor has collateral to secure payment of the debt.
Here are some examples:
- An automobile loan
- A mortgage loan
- A home equity loan (which is a type of mortgage)
- A judgment lien
- A homeowners association lien
- Some timeshares
- Tax liens
Your Chapter 13 plan (sometimes called a “plan of reorganization”) must “treat” secured claims. That is, it must explain how the plan will affect the secured claim. Some examples of treatment of secured claims are:
- Retain the Ford F-150 and pay South Carolina Federal Credit Union 5.25% interest on its secured claim for the truck.
- Retain the Ford Focus and pay Bank of America $5,000 as its secured claim with 5.25% interest. The other $3,000 of its claim (assume you owe $8,000 total) to be paid the same distribution as the unsecured creditors. (Let’s assume the unsecured creditors are receiving 10% of their allowed claims; here, Bank of America would receive $300 on the unsecured portion of its claim, 10% of $3,000).
- Value (strip off) the home equity loan (second mortgage) as being wholly unsecured, thereby treating the loan as an unsecured loan. (For a more detailed explanation of how you can do this with a mortgage, see “Mortgage Stripping in Bankruptcy”.)
- Surrender the property securing the Sun Trust mortgage on the home in Virginia Beach, Virginia.
Now, let’s discuss surrender of that property with the mortgage in Virginia
Let’s say that Joe is in the Navy and was stationed in Virginia. He received orders to transfer to Charleston, South Carolina. He’s married and has three children. They have a home in Virginia Beach, Virginia. However, they have a big problem: the home is worth only $225,000 but they owe $250,000. Maybe Joe also has some other debt like credit card debt, so he and his wife would like to explore bankruptcy options to reorganize their financial life.
If Joe files a Chapter 13 bankruptcy, his plan can provide that he’s surrendering that Virginia home. This does not mean that, upon confirmation of his plan, title to the property magically transfers to Sun Trust Bank. It simply means that Joe’s plan will not provide for any payment to Sun Trust on the secured claim—that is, the mortgage note. It also means Sun Trust is free to take necessary action to obtain its collateral (here, the home by foreclosure). Once Sun Trust forecloses on the home, it also has the right to file a claim for the deficiency (the amount left on the debt after applying the foreclosure sale proceeds) and to participate in the distribution to the unsecured creditors.
Surrendering property in a Chapter 13 bankruptcy can be a useful way of dealing with property that you no longer wish to retain. But you need to understand that nothing requires the creditor to take back (foreclose or repossess) the property being used as collateral.