When individuals with sizable debts decide to file for bankruptcy, they face other decisions that include whether or not to surrender property in their possession. The property to be surrendered secures debt that no longer can be paid. The implications of this decision are defined by definition of “surrender.” This is the necessary starting point.

What Does Surrender Really Mean?

The Bankruptcy Code does not provide a definition of the word. Instead, one is left to reviewing cases to determine what actually happens when property is surrendered. Also, property surrender can occur in Chapter 13 as well as Chapter 7. The main focus is on Chapter 7 bankruptcies since it is more often seen in this context. Following this post is a look at instances in which Chapter 13 surrenders can differ from those under Chapter 7 as well as what the differences can mean to debtors.

One Analysis of Surrender

In re Kasper is a 2004 case involving a Chapter 7 bankruptcy decided by the U.S. District Court in Washington, D.C. It provides an extensive analysis of relevant parts of the Bankruptcy Code to interpret “surrender.” The debtor had filed for bankruptcy under Chapter 7. As a result, he had to file a Statement of Intention regarding what he planned to do with property that acted as collateral for secured loans according to Section 521 of the Bankruptcy Code.

The debtor filed this form but did not select any of the choices that were listed. Instead, since he was current with the loan payments owed to Ford Motor Credit Company, the debtor’s stated intent was to “retain possession” of the car (which had a loan balance greater than the car’s current value).

Before the estate closed, Ford filed a motion to compel the debtor to file a statement in which he had to make one of three choices: surrender the property; redeem the property; or reaffirm the debt. Redemption would involve the payment of the amount of the allowed secured claim on the property. Reaffirmation restores personal liability that would cease with the closing of the case, although the car itself still would be collateral for the debt.

Defining “surrender” was the key to the court’s decision regarding the motion. The court focused on the 3 options listed with the retention of property in the Statement of Intention. These are exempting property, redeeming property, and reaffirming debt. A person who decides to retain property can choose among these options “if applicable.”

This interpretation led the court to see “surrender” as meaning turning over property to the trustee (and not directly to the lienholder) for administration under the debtor’s surrender obligation in  Section 521(a)(4) of the Code. Essentially, this would result in the car being subject to any lien enforcement rights under nonbankruptcy law that the creditor could exercise after the Chapter 7 automatic stay ended. The court denied Ford’s motion, believing that the debtor actually stated the intention to surrender the collateral to the trustee’s administration. This would result in Ford eventually having the option to enforce its rights under nonbankruptcy laws to get the car returned to it.

Courts Have Differed In Interpreting Surrender

Other courts, including the Bankruptcy Court for the Western District of Pennsylvania, have not made as an extensive of an analysis of “surrender” and have found a simpler meaning that seems to leave out a step (although the Bankruptcy Code’s lack of a clear definition for “surrender” makes this debatable). For example, in In re Losak (2007), the Western District of Pennsylvania decided that surrender means that collateral is given to the lienholder, which then can decide to pursue its rights under nonbankruptcy law. In re Failla, from Florida’s Southern District in 2014, focused on surrender meaning that a debtor agrees to not fight the lienholder’s exercise of rights under nonbankruptcy law. Of course, the endpoint is the same, and, ultimately, this is what matters.

When property that secures a debt is surrendered, a lienholder can pursue enforcement rights via nonbankruptcy law while the debtor indicates no intent to fight these actions, as long as those laws are not violated (see In re Ryan, 560 B.R. 339 (2016), from Hawaii that makes this point). However, until the creditor acts, the debtor retains title or ownership in the property. This last point is the main concern: surrender, by itself, does not change the owner of property.

Implications of Surrender for the Debtor Remain the Same

Since the owner has not changed, who is responsible for the property has not changed unless there is further action. Many debtors who have decided to surrender property seem to be caught unaware of the implications of this.

The Statement of Intention in Chapter 7 provides a blueprint for the future because the debtor does not transfer ownership or title immediately to the creditor. The implications are easiest to see if real property is involved. When a house secured by a mortgage note is surrendered, the debtor’s obligation regarding the mortgage payments and any deficiency balance that may exist will cease after the bankruptcy. While personal liability ends, there remains a property lien on which the creditor can foreclose. Obligations that arise after the date that the bankruptcy was filed belong to whoever is the named owner on the deed.

Problems When the Creditor Is In No Hurry to Foreclose On a House

The debtor’s problem is that the creditor may decide not to foreclose, and, until a foreclosure sale occurs, the debtor remains the person whose name is on the deed. This leads to consequences that a debtor often did not anticipate when the surrender option was chosen.

As long as the debtor in bankruptcy remains the owner on the deed, this individual remains responsible for property taxes that will be assessed. In addition, if a third party gets injured while on the property, the record owner of the property could face liability. This means that insurance should be maintained, despite the surrender of the property. Maintenance and upkeep also must be considered – for example, some utilities may need to remain turned on, and the debtor will get the bills.

The individual could look at options to get rid of the property when the creditor is in no hurry to foreclose. The property potentially could be sold, but anyone who has a lien in place must agree to the sale. Offering a deed in lieu of foreclose is a possibility, but acceptance by the creditor is not likely. Then again, the debtor could wait for the foreclosure process to occur, although a Chapter 7 bankruptcy as well as nonbankruptcy laws do not provide ways to force the issue. However, even after a surrender of this property, the debtor could decide to remain there as long as possible because ownership has not changed. Depending on the condition of the real estate, this could be the best choice.

Consider Possible Problems When Surrendering Property

Other types of property securing debts that were surrendered during the course of the bankruptcy can present similar problems, although on a somewhat smaller scale. A car must be maintained and insured, for example. If the debtor’s name remains on the title, then the debtor will be responsible for the collateral. Therefore, whenever property surrender is the chosen method of dealing with secured debt, the debtor filing the Statement of Intention under Chapter 7 first must consider the consequences since surrender does not mean an instantaneous change in ownership.

A Few Words about Surrender in Chapter 13

A Chapter 13 bankruptcy can involve surrender of property, too. This can occur when the Chapter 13 plan does not provide for payments regarding property that secures a debt. The creditor in this situation may pursue a deficiency claim and follows this by participating in the distributions to unsecured creditors. This debt must be handled in this way because, after the collateral has been surrendered under this chapter, the debt that had secured specific property becomes unsecured debt.

However, the surrender of property in Chapter 13 does not automatically change ownership of that property so debtors are in the same position here as with a Chapter 7. There is a potential mechanism for a surrender to result in the creditor being forced to take ownership in a Chapter 13 bankruptcy. When a debtor’s Chapter 13 plan is confirmed, the case does not end because the plan may take 3 to 5 years to be completed. During this time, the Bankruptcy Court continues to have jurisdiction over issues involving the plan. If a confirmed plan’s success is jeopardized when a creditor leaves property to be returned in limbo, the Court could issue an order that forces the completion of the transfer.