Surrendering A Secured Asset Does Not Eliminate A Deficiency Amount Due And Owing

When you surrender a secured asset like a vehicle in bankruptcy, the process doesn’t automatically absolve you of all financial responsibility, especially concerning any deficiency balance. A deficiency occurs when the value of the secured asset is less than the amount owed on the loan. Here’s how this typically works in the context of Chapter 7 and Chapter 13 bankruptcies:

Chapter 7 Bankruptcy and Secured Debts

1. Surrendering the Asset: In Chapter 7 bankruptcy, if you choose to surrender a vehicle, the creditor can sell it. If the sale amount doesn’t cover the outstanding loan balance, there’s a deficiency.
2. Discharge of Deficiency: The good news in Chapter 7 is that while you’re surrendering the vehicle, the bankruptcy discharge generally covers the deficiency balance. This means you shouldn’t owe anything more on the loan after the asset is sold and the bankruptcy discharge is applied.
3. Creditor’s Rights: The creditor has the right to repossess and sell the vehicle but must notify you of the sale and allow you to attend. The sale must be conducted in a commercially reasonable manner.

Chapter 13 Bankruptcy and Secured Debts

1. Treatment of Secured Debts: Chapter 13 allows for the reorganization of debts, including the potential to cram down certain secured debts to the value of the asset. However, this typically doesn’t apply to vehicles purchased within 910 days before filing for bankruptcy.
2. Surrendering the Vehicle: If you surrender the vehicle in a Chapter 13 bankruptcy, the deficiency after the sale of the vehicle becomes an unsecured debt. This unsecured debt can be included in your repayment plan, often paid at the same percentage as other unsecured debts, which might be less than the full amount owed.
3. Discharge of Remaining Debt: At the end of your Chapter 13 repayment plan, any remaining deficiency balance included in the plan is generally discharged.

Important Considerations

• Legal Advice: It’s crucial to consult with a bankruptcy attorney to understand how surrendering a secured asset will affect your specific situation, as laws and procedures can vary by jurisdiction.
• Asset Value vs. Loan Balance: The key factor in whether you’ll owe a deficiency is the value of the vehicle compared to the balance of the loan. If the loan balance exceeds the asset’s value, there’s a potential for a deficiency.
• Post-Bankruptcy Obligations: While bankruptcy can discharge your obligation to pay a deficiency balance, it’s essential to ensure that this is clearly outlined in your bankruptcy discharge and understood in the context of your overall bankruptcy case.

In summary, while surrendering a secured asset like a vehicle in bankruptcy can relieve you of the obligation to make further payments on the loan, the treatment of any deficiency balance depends on the type of bankruptcy filed and the specific circumstances of your case. Always seek professional legal advice to navigate these situations effectively.