When Surrender Doesn't Mean Surrender
Updated: May 16, 2020
In bankruptcy, some words don't have their ordinary meanings. "Surrender" is one of these words.
Many people who file bankruptcy surrender real estate or their car. They think that once they tell the Court, the Trustee, and the lender that the item is being surrendered they're given it up and they're done with it. They're not.
When property is surrendered in bankruptcy, it doesn't mean that the creditor automatically becomes the owner. All that it means is that creditors who have liens on the property can exercise their state law rights with respect to the property. In non-legalese, this means that they can foreclose on or repossess the property as your state's laws allow. It DOES NOT mean that they become the owner UNTIL they complete the state law requirements for becoming the owner.
In the case of real estate, this means that they must file, notice, and complete a foreclosure auction. In the case of a car, this means that they must follow state law procedures to allow it to repossess and sell the car.
Until this process is completed, you remain the owner --- even if the house is vacant or the car is up on blocks or was given back to the bank. It means that if the mortgage company is taking its own sweet time in foreclosing (as it seems to do when you want it to foreclose), you're still the owner. It means that if the car loan company doesn't want the car, you're still the owner. And remaining the owner has big implications.
In the case of a house, if there are HOA or condo fees, as the owner you might be responsible for them -- the bankruptcy only wipes out the fees that were due before your case was filed. If your HOA or condo or municipality requires you to keep the law mown, and you don't, it can do it and charge you for it. If the property deteriorates, the municipality might condemn the property and could even tear it down as a safety hazard...and charge you for it. If someone slips on an icy walkway, as the owner, you're responsible.
For these reasons, I recommend that you keep the property insured until it's actually foreclosed upon. (The bank's force place insurance protects the bank, not you.) I also usually recommend renting out the property for a low rent until the foreclosure occurs--just enough to pay the HOA or condo fees, keep it maintained, and pay the insurance.
In the case of a car, you have a few choices. You can keep driving the car until the bank takes it. You won't be able to trade it in because of the lien, and you need to keep it insured, but you can still use it. The bank can take it at any time. You can drop the car off at the bank, get a receipt for the keys, and it's their problem. In some cases, we can ask the Court to allow the car to be redeemed.
Ask us about your options for dealing with "surrendered" items so that you are clear on what actually happens.