Most people would not consider the ability to surrender a secured property a weapon. When individuals consider giving back a secured asset they view it as a failure. It could be because it was the wrong asset, the debtor paid too much for the asset, or accepted a bad interest rate. Sometimes, the debtor feels like a failure because what was once affordable has become unaffordable due to unforeseen circumstances. Debtors must realize that these are not failures; rather, they have come to understand when they need help and have decided to be proactive in dealing with the situation rather than ignoring the problem that is growing.
Consider that both bankruptcy Chapters 7 and 13 allow debtors to keep or surrender assets that are tied to a loan. In a Chapter 13, a third option is available: debtors may even catch up on arrearages (deficiencies) on that loan. Naturally, the debtors’ decisions will impact the nuances in the debtors’ individualized case. Example: Mr. and Mrs. Debtor have a family home, an investment condo, and three cars with loan payments. They recently experienced a significant drop in income and unexpected expenses for their home. They can choose to use a chapter 13 to surrender their condo and one unnecessary vehicle while keeping their home and the other 2 cars. Now the family is in a better position to regain its footing. They won’t have to fear deficiency judgments, garnishments, attorney’s fees from the creditor and harassing phone calls. They can proactively move to make their life easier and build from this new financial footing. The ability to pick and choose assets like this is available in both chapter 7 and chapter 13.
Furthermore, some individuals may have even a greater power than just picking and choosing assets they want to keep or surrender (and therefore the corresponding debts). They may be able to keep a home with two mortgages but remove just the second mortgage completely. By stripping off the 2 nd mortgage from the home, the debtors not only relieve their personal obligation to pay the 2 nd mortgage but they can also remove the lien from the land itself. The power to strip a second mortgage is available in both chapter 7 and chapter 13. For more information, see our blog: Lien Stripping: Chapter 13 and 7?
It is important note is that surrendering your property in a bankruptcy does not change your ownership of the asset, until the creditor takes action to take back possession. If you surrender your home in a bankruptcy, you are still the owner until the bank takes possession through a foreclosure sale, short sale or deed in lieu. Debtors who surrender their home in the bankruptcy merely surrender their obligation to pay the underlying debt, ownership requires the banks actions. Similarly, when debtors surrender their vehicle, it is still owned by the debtors until the vehicle has been repossessed.
The bankruptcy petition requires that debtors list all of their assets and all of their debts on their schedules but it also allows them to pick and choose which assets (and corresponding debts) that they want to keep and which they want to surrender. Therefore, if debtors are facing default notices and threats of lawsuits some proactive action on their part may give them more options. Take advantage of our free consultations to learn about your options. With the power of this knowledge you can use the bankruptcy to improve your financial life.