Surrendering Property in Bankruptcy

A common misconception about bankruptcy, especially Chapter 7 bankruptcy, is that you lose all of your property upon filing. This isn't true; we've discussed in this space how bankruptcy exemptions and a lack of equity in property can protect your property and allow you to keep most, if not all, of it throughout your bankruptcy. On the flip side of that, though, Chapter 7 can be a convenient avenue to surrender your secured property without paying on it.

Surrendering your property is simple: you just stop paying on it. If you are surrendering a car, you can either stop paying and let the car company come and repossess your car, or you can voluntarily surrender it. When surrendering a house, the process is much more drawn out and slow. You stop paying on the mortgage, and if you are in the active bankruptcy, the mortgage company will need to first file a motion to lift the automatic stay, then attempt to collect on the debt, and then file foreclosure proceedings. Considering how frequent foreclosures happen in this economic climate to begin with, the process of waiting to leave your home that you are surrendering takes months and sometimes even years.

The end result for both in a Chapter 7 is the same: a complete discharge of any liability on the property's loan. When secured property is surrendered and ultimately sold, a deficiency balance is left remaining if the amount the property was sold for is less than what was originally owed by the debtor. Normally, this debt (which is now treated as unsecured), is still going to be owed by the debtor. Yet, in a Chapter 7 bankruptcy, the deficiency balance is discharged just like every other unsecured debt.

Often, this debt can be large enough to necessitate a bankruptcy filing in and of itself. As a result, it is best to consult an experienced bankruptcy attorney before contemplating such a decision on your own.