The Benefits of Surrendering Collateral in a Chapter 13 Bankruptcy
When considering filing for bankruptcy, there are lots of good reasons you might choose to file under Chapter 13 rather than Chapter 7. Many debtors make this choice based on the property they own. Perhaps you need to keep a vehicle that you use to get to work, but it wouldn’t be covered by an exemption under Chapter 7. You may be behind on loan payments on your home or car and need the time to catch up that a Chapter 13 filing will give you.
When keeping property doesn’t make sense
That said, you may own property that would be more trouble and expense than it’s worth to you to keep it. Your home or car may have lost much of its market value, but you would still need to make substantial payments to keep it. In such cases, even if you could hold on to that item, you might benefit more in the long term by using the protections of a Chapter 13 filing to surrender the collateral.
Making a secured debt unsecured
Collateral is the physical property that makes a debt secured rather than unsecured. Secured debts are one of the forms of debt that are given priority in a Chapter 13 bankruptcy filing. If they are not paid, the creditor has the option of repossessing that property. When you surrender the collateral to the creditor, you will no longer be obligated to pay back the value of the collateral. However, the creditor can file a claim against you for the deficiency, which is the amount remaining on the loan when the value of the property has been deducted.
A claim for the deficiency is an unsecured claim, which will be lumped in with your other unsecured debts such as credit card or medical bills when creating a Chapter 13 payment plan. Since the amount of your payments will be based on your disposable income, the amount of those payments likely won’t increase with the addition of another unsecured debt. At the conclusion of your repayment period, the remaining amount owed on any unsecured debts will be forgiven.
If you’ve become overwhelmed with debt and need help finding a way out, contact the seasoned and knowledgeable Maryland consumer law and bankruptcy attorneys at Haeger Law for a consultation, in Germantown at 888-463-3520.