Why Surrendering Your Car or House in a Chapter 13 May Create Unexpected Problems
One of the more powerful tools available to you when you file a personal bankruptcy has to do with your option to cancel an installment contract and surrender secured collateral. This applies to all forms of secured collateral, including such things as houses, motor vehicles, furniture, and jewelry.
In a Chapter 7, your surrender of secured collateral will usually mean an end to your obligation to the secured creditor. Any remaining debt owed to the creditor for a deficiency balance will be treated as unsecured debt and unsecured debt is generally going to be eliminated with your Chapter 7 discharge.
In Chapter 13, however, your act of surrendering collateral does not necessarily mean that you are done with the now unsecured creditor. Unsecured creditors often do get paid in Chapter 13 – sometimes as little as 1 penny on the dollar, but sometimes as much as 100 pennies on the dollar (i.e, they are paid in full).
In fact, debtors often find themselves in Chapter 13 because they have too much equity in property to fit in to a Chapter 7, or because they have too much disposable income to qualify for a Chapter 7. In these cases, unsecured creditors are likely to receive distributions from the Chapter 13 plan.
When you surrender “big ticket” secured property like a house or a car, the secured creditor can file, or amend a prior filing, to reflect an unsecured debt arising from their deficiency claim. For example, if you file your Chapter 13 and include a $25,000 debt to Ford Motor Credit, and you elect to surrender that vehicle back to Ford in your plan, Ford will ask the bankruptcy judge to lift the automatic stay, sell the vehicle, then file an unsecured claim for any deficiency balance.
In this example, if Ford sells the surrendered vehicle for $15,000 at an auto auction, Ford would have the right to file a $10,000 unsecured claim.
If your plan calls for a 100% dividend to unsecured creditors, that $10,000 unsecured claim will increase your plan obligation by approximately $167 per month.
As a practical matter, your surrender of secured collateral could also create delays in the confirmation of your case. I am currently representing a Chapter 13 debtor in a case filed in September 2017. Our plan, filed at the same time as the case, calls for surrender of a large SUV to the secured creditor. Despite this, the secured creditor filed a secured proof of claim totaling $18,000 plus interest.
I called and wrote the creditor to try to move the surrender along. Despite my efforts, nothing happened – the creditor took no initiative to recover the vehicle.
Finally, after about 6 weeks, I filed a Motion to Disallow Claim. I appeared in court but the creditor did not show up. The judge issued an order disallowing the secured claim but allowing the creditor to file an unsecured claim.
Finally, in December, the creditor picked up the vehicle. In early February, the creditor filed a motion for relief from stay (this is necessary so that the creditor can sell the vehicle). This motion is scheduled for a hearing in late February. I have no objection to the motion because I want the vehicle sold.
Assuming the creditor follows Georgia law regarding the sale of a surrendered vehicle, we won’t have a deficiency claim filed until mid-March at the earliest.
Meanwhile, the Chapter 13 trustee keeps resetting the confirmation hearing in this case because we don’t have a final list of all claims. Remember, this case was filed in September, 2017 and it is unlikely to be confirmed until late March or even April of 2018. And I may have to increase the plan payment if the deficiency balance comes in higher than expected. Very frustrating for all concerned but we are at the mercy of the slow moving secured creditor.
If you plan to surrender a house in your Chapter 13, you could very well face the same issues, depending on how your state law provides for real estate deficiency claims.