The Costs and Benefits of Surrendering Collateral in Chapter 13

Posted by Kevin on June 25, 2013 under Bankruptcy Blog | Be the First to Comment

The Simple Surrender

If you’ve decided to surrender your home, vehicle, or any other collateral that you no longer need or want to pay for, filing a Chapter 7 “straight bankruptcy” is usually the cleanest way to go. The remaining debt on the home is mostly either discharged (legally written off)—including 2^nd mortgages, judgments, utilities—or is paid off by the mortgage holder after taking back the real estate—such as property taxes and homeowner association dues.  On your vehicle loan, the often large “deficiency balance”—the amount you would owe after the creditor sells the vehicle and applies the sale proceeds to the loan balance—is discharged. You give up the collateral but you are quickly free of the debt.

The Possible Delayed Surrender

If you wanted to keep the property, Chapter 13 allows for that.  But what if you know that your job may not last for more than another year, so you’re sensibly facing the reality that at that point you would likely not be able to continue making payments on the home or vehicle?  Once again, Chapter 13 is the way to go.  It allows you to make usually reduced payments while you have your job so you can keep the home or vehicle.  Then, if you lose your job, you can convert to Chapter 7, surrender the property and have the debt discharged.  Clearly, Chapter 13 gives you a lot a flexibility under these scenarios.

Flexibility at a Price

But, as with most things in life, there is a cost factor for this flexibility.  Chapter 13 costs more in fees than Chapter 7, easily twice the cost, or more. The attorney fees are much higher because it is more work over a longer period of time.  Plus the Chapter 13 trustee receives a percentage of what you pay to the creditors. Yes, you may save some money to retain the property in Chapter 13 as opposed to what the regular payment would be; however,  those savings you may be partially or even fully offset by these higher fees.