Surrendering a Property in a Chapter 13
Surrendering properties in a Chapter 13 has been a hot topic ever since the housing bubble burst a couple of years ago. The scenario is usually as follows: debtor would like to get rid of an investment property that is no longer a good investment. The investment property has 2 mortgages. The first is close to the value of the house, and the second is between 50k-100k. Debtor does not qualify for a Chapter 7 bankruptcy or has too many assets that would be liquidated in a Chapter 7. The debtor is exploring his/her options in a Chapter 13. Debtor has 2k-10k in credit card debt and has $1200 in disposable income each month. Can the debtor surrender the property in a Chapter 13 and only pay back their credit cards?
Yes; in a Chapter 13 bankruptcy, the debtor proposes a plan to the creditors to pay back a portion of what they owe depending on how much disposable income is left over each month. In the scenario above, it would be ideal for the debtor to file a Chapter 13 and only pay back the credit cards and not the 2nd mortgage. The Chapter 13 plan must contain "special language" that proposes surrendering the house in satisfaction of the first AND second mortgage. Creditors can always object to a plan if they have a valid objection. One would think that the second mortgage would object since they most likely will not receive a dime in the plan since the first mortgage will receive what they are owed at a foreclosure sale. Practical experience dictates thats not always the case. Since the debtor is surrendering the collateral that secures the 2nd mortgage, most creditors will not object to the plan and the debtor is able to sever their personal liability on the first and second mortgage without paying a dime to either. In the meantime, the Chapter 13 debtor can pay their credit cards through the plan and be completely debt-free in a short period of time. Chapter 13 bankruptcies can be very complex. Therefore, it is imperative that you consult with a competent bankruptcy attorney before taking action.