What Happens to Collateral I Surrender in my Bankruptcy?

A few months ago I wrote about What Happens to Real Estate when you surrender it in a Bankruptcy. Now, I want to discuss what happens to personal property like vehicles, mobile homes, furniture, and other household items when you surrender them in a bankruptcy.

What are Secured Creditors?

Let’s start with Secured Creditors. These are creditors who hold liens of some kind against your property. With personal property, the most common types of liens may be a lien on a vehicle title, a purchase money security interest or a security interest under the Uniform Commercial Code (UCC). Basically, if an entity loans you money based on collateral (vehicles, mobile homes, furniture and other household items) they are a secured creditor.

One of the first things you will review when you speak to a knowledgeable bankruptcy attorney is the types of creditors you have and how they will be treated in your bankruptcy. A big benefit of filing either Chapter 7, straight bankruptcy or Chapter 13 Debt consolidation bankruptcy is to get relief from paying some or all of your creditors so making decisions about how you treat each debt can be the key to a successful bankruptcy discharge. You may determine that you cannot afford to keep all of your personal property.

What Does Bankruptcy Do?

The main purpose of a chapter 7 bankruptcy is to discharge unsecured debt. If you owe secured creditors, you must determine whether or not you can afford to keep the collateral or if you are better off financially to surrender the collateral to the lienholder. In a Chapter 13, all of your debt, both secured and unsecured, is consolidated into one monthly payment. Here, even though you may commit to paying back some or all of your debt, it may not be affordable to keep all the collateral.

What Happens to Collateral When You Surrender It to a Creditor?

So what happens to the collateral when you surrender it to a creditor? If you agree to surrender something to a creditor, the creditor may, in essence, repossess the item. Once they have their security back the debt is then an unsecured debt. In a chapter 7 bankruptcy, this debt is then discharged. In a chapter 13, the creditor will have the right to file an unsecured proof of claim and be paid some or all of the deficiency balance left on the loan after the collateral is disposed.

In some cases, you may agree to surrender collateral, but the creditor never comes to get it. The issue here, even with personal property, is similar to that of real property discussed in my previous blog.

The lien on the property will survive your bankruptcy discharge. If the creditor fails to repossess the collateral, the lien on the collateral will still exist however, the creditor cannot try and collect money from you for the collateral after the bankruptcy is discharged. The creditor can still enforce their right to pick up the collateral.

Sometimes, the secured creditor decides not to repossess the collateral and will simply abandon it.  A creditor is not required to pick up surrendered items but, as stated, it can never try and make you pay for it later on. This would be a violation of the bankruptcy discharge.

Contact a Bankruptcy Attorney for Help Today

These situations can be tricky to navigate without proper counsel. Therefore, my best advice is to seek out a bankruptcy professional who has experience dealing with secured creditors so that you get the best advice.

If you are having any issues with debt, please give our nearest office a call. You can schedule a free consultation with a knowledgeable attorney who can help you navigate these issues.