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Surrendering Collateral in a Chapter 13 Bankruptcy

Post-it that reads Chapter 13

There are numerous reasons why debtors choose to file for bankruptcy under Chapter 13 rather than Chapter 7. You may have done so because you do not meet the income limits to file for Chapter 7, because you own property you wish to keep that would not be covered by a Chapter 7 exemption, or because you want the opportunity afforded by a Chapter 13 plan to catch up on loan payments on your possessions.

When holding onto property doesn’t make sense

Even though Chapter 13 is often the choice of debtors who want to keep their property, you may own certain property that no longer holds as much value as it did when you initially purchased it, such as a home that has declined sharply in value. It is also possible that it is not worth the money to you to hang on to a vehicle for which you’re very behind in payments, even if Chapter 13 can help you reduce those payments from what they were prior to your bankruptcy filing. In these cases, it may be to your advantage to surrender that property.

Surrendering collateral and making a debt unsecured

Turning your property over to the lienholder is known as “surrendering collateral.” When you surrender collateral, you’re basically turning secured debt into unsecured debt. Assuming the value of the property does not eliminate the full balance of the debt, you’ll still owe the amount that remains on that loan. However, by surrendering the property in the course of your Chapter 13 bankruptcy, it is less likely that you will have to pay back the full outstanding amount. The unsecured debt will be included in your Chapter 13 repayment plan, along with any secured debts for property you’ve decided to keep and other priority debts, such as child support or income tax debts. Since the monthly plan payment is based off of the debtor’s income, the amount of the payment can only go so high, and many debtors don’t make enough to pay towards both their priority and secured debts and their unsecured debts. At the conclusion of your 3-5 year bankruptcy case, the remaining amount of the unsecured debt is eliminated.

If you are considering filing for bankruptcy in Southern California, speak with the experienced and dedicated Ventura bankruptcy lawyers at Rounds & Sutter for a free consultation at 805-650-7100.