In South Carolina, when one files a personal bankruptcy, one of the benefits available is that a secured loan transaction can be erased simply by returning the collateral that stands as security for the loan. Thus, surrendering a car will put to rest the creditor’s claims. There may be a deficiency amount that the creditor will claim, but in a Chapter 7 straight bankruptcy, the bankruptcy attorney will see to it that any deficiency will be discharged as an unsecured debt.
In a Chapter 13, which is a payment plan, the surrender of collateral will generally end the creditor’s claim. However, in the case of a deficiency still due, it may be filed as an unsecured claim in the Chapter 13. Unsecured claims will generally get paid some very small percentage of the debt that is claimed. The difference, therefore, where the collateral is surrendered, is of little significance between a Chapter 7 or a Chapter 13 under the foregoing examples.
However, the creditor on a secured item may be paid where the filer decides to keep the collateral. If it is a house or a car, the regular payments must continue to be made during the Chapter 13. If the regular payments are not made, the creditor can get permission from the automatic stay and repossess the car or foreclose on the house. When a house, car or other collateral is worth more than the balance of the loan, that situation can become problematic if the exemptions provided in the state of filing do not cover the amount of the equity owned.
If there is too much equity, that amount must be paid in the Chapter 13 plan as monthly payments over the extent of the plan. Generally, that doesn’t happen often because, in South Carolina and elsewhere, the bankruptcy attorney will have discussed the issue with the filing debtors, and they will have agreed on an appropriate way to handle the issue. If you have an equity issue, there are several ways to successfully confront it, and the strategy must be discussed and decided with your attorney’s guidance.
Source: bankruptcylawnetwork.com, “WHY SURRENDERING YOUR CAR OR HOUSE IN A CHAPTER 13 MAY CREATE UNEXPECTED PROBLEMS”, Jonathan Ginsberg, Feb. 6, 2018