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Chapter 7 Bankruptcy: How to Surrender an Underwater House
Did you know you can return the property to the lender and then discharge the secured debt during your Chapter 7 bankruptcy? Many homeowners turn to bankruptcy to “save” their homes. They want to avoid foreclosure, get caught up on their payments, and re-establish themselves financially with the primary goal of keeping their home. But the story can be quite different when the family home has become the overwhelming financial burden leaving the individual or family in dire financial straits. If you feel stuck in an impossible situation because you’re buried in debt and living in an underwater house, you do have the option to surrender the underwater house during your Chapter 7 bankruptcy.
How to Surrender Your House in Chapter 7 Bankruptcy:
When you put collateral up to secure a loan (a car, a home, or other property), you are required to either pay the debt as agreed or release ownership of the property designated as collateral. The collateral property is surrendered to the lender when secured debt goes unpaid. During Chapter 7 bankruptcy, petitioners wishing to surrender their house tell the lender and the court using the appropriate bankruptcy form ( Statement of Intention for Individuals Filing Under Chapter 7). The proper form needs to be submitted to the court within 30 days of the bankruptcy petition date or before the meeting of the creditors (if the meeting is scheduled within 30 days of filing).
What Does It Mean to Surrender Your House?
When a bankruptcy petitioner has secured debt, they have three options. They can surrender the property associated with the secured debt, they can redeem the debt, or they can reaffirm the collateralized property. Redeeming the debt means paying the value in a lump sum. Reaffirming means entering a new contract for the property to keep it after bankruptcy. Those who do not wish to keep their house (or other property) can surrender the property or give it back to the creditor. During Chapter 7 bankruptcy, surrendering property means giving the property back to the lender voluntarily or of your own accord. The borrower is not responsible for any deficiency amount still owed on the loan once the creditor sells the property.
What Is the Definition of Secured Property?
Any property used as collateral for a debt or loan is referred to as secured property. If a borrower stops paying on a secured loan, the creditor has the right to take the “secured” property and sell it to pay toward the balance of the debt. For example, a mortgaged home is “secured” property, and financed vehicles are “secured” property. Other types of property that are frequently used to secure debt include jewelry, household appliances, electronics, etc. that are financed at purchase.
Why Do Creditors Prefer Secured Debt?
Creditors prefer secured debt to unsecured debt. When dealing with secured debt, the creditor has two methods of obtaining payment. The lender can hold the borrower personally liable for the full balance of the loan. If the borrower does not pay, the lender can turn to their second method of obtaining a payment – selling the secured property and using the proceeds of the sale to pay toward the balance owed on the debt. When the sale of the secured property does not cover the full balance of the loan, the borrower is left responsible for the remaining balance or “deficiency.” When the borrower obtains a Chapter 7 discharge , the liability (and any deficiency) is wiped out, but the secured creditor still has the right to the secured property. The borrower does not get to wipe out their auto loan debt without returning the car. Still, the lender loses the right to go after the borrower for any remaining balance left on the loan after the proceeds of selling the vehicle are applied.
When Does Surrendering Property in Chapter 7 Bankruptcy Make Sense?
Most people who voluntarily return secured property or “surrender” property, either can’t afford it or they no longer want to make the payments. In some cases, the property is not worth keeping because it is worth so much less than the amount owed on the loan balance. In other cases, the petitioner places another piece of property at a higher priority, and they use their bankruptcy exemptions to protect the other property and willingly surrender others. If you aren’t sure what you should do, discuss your options with an experienced bankruptcy attorney.
If you know you need help getting out of debt, but you aren’t sure if you should surrender your property or not, contact the law office of Kenneth C. Rannick P.C. We can help you determine the best options in your situation. You don’t have to deal with the financial struggle alone. Bankruptcy can be an overwhelming process, but at the law offices of Kenneth C. Rannick P.C., you’ll work with Consumer Bankruptcy Specialists. We help relieve the stress, ensure all bankruptcy paperwork is appropriately filed, and work to expedite the bankruptcy process so you can get a fresh financial start.
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