Should You Surrender Collateral in a Chapter 13 Bankruptcy?
One reason people choose a Chapter 13 bankruptcy over a Chapter 7 is that they do not want to lose property. In a Chapter 7, the trustee can sometimes sell property and distribute the proceeds to unsecured creditors. As a result, you might lose your car, boat, or other property.
But what happens if you have collateral that secures a loan? Should you simply turn over the collateral to your creditor in a Chapter 13? Read on for more information about when this might be appropriate.
Chapter 13 and Secured Debts
Many people use assets to secure loans. For example, a car secures the car loan and furniture can sometimes secure a furniture loan. In the event of default, the creditor can seize the collateral.
Secured debts survive bankruptcy, so you cannot wipe them out in either a Chapter 7 or 13. However, you do have the option of handing the collateral to your creditor, who can then sell it. If the proceeds from the sale equal or exceed your loan amount, then your debt is wiped out. If not, then the remainder left unpaid becomes an unsecured debt.
For example, Amanda might have used collateral to secure a $10,000 loan. The collateral is worth $8,000, so the $2,000 remaining becomes an unsecured, non-priority debt, just like credit card or medical debt.
Should You Turn Over Collateral?
In a Chapter 13, debtors enter a three- to five-year repayment plan, contributing any disposable income each month to their debts. However, debts are classified, with some taking priority over others. For example, child support payments must be made before a debtor pays off their credit cards. As a result, some debtors spend all of their disposable income on priority debts, leaving nothing each month for unsecured creditors. At the end of the payment plan, any unpaid unsecured debts get wiped out.
As you can see, surrendering collateral might make sense if you are currently not contributing anything to unsecured, non-priority debts. Even if the collateral does not completely cover the loan, your creditor is left with only an unsecured, non-priority debt, which will probably get wiped out.
Before deciding to surrender collateral, you and your bankruptcy attorney should analyze how much you are spending to keep the collateral. For example, some collateral might cost a lot of money to maintain. By surrendering it, you can wipe out an unnecessary expense.
Surrendering collateral is also a good way to get rid of a creditor, especially if you have had problems with them in the past. If all goes well, the debt will be completely gone when you complete your payment plan.
Speak with a Bankruptcy Attorney in Plantation, Florida
Whether to surrender collateral is a tricky question for a Chapter 13 debtor to make. At Nowack & Olson, we help our clients think through their bankruptcies so that they end up stronger at the end of the process than when they began. With offices in Doral, Jupiter, Boca Raton, and Plantation, we are never too far away. To schedule your consultation, please call us today at 866-907-2970.