CHAPTER #35 “Surrendering” Property & Real Estate in Bankruptcy

Bankruptcy filing does not get rid of your title to real estate or other items. It just gets rid of debt you are obligated on that arises before filing the bankruptcy. You cannot "surrender" anything. Marking "surrender" on a form in bankruptcy just means you are not going to "reaffirm" your personal obligation for secured debt incurred before bankruptcy filing, nothing more: the property is still in your name and bankruptcy won't help you get rid of it.

During and after any bankruptcy the property is still yours, unless the trustee sells it. So how do you get property you don't want out of your name? You have to sell it, or let the lien holder foreclose on it and sell it to someone else in a sheriff sale.

You are liable for condominium assessments after you file unless you let the condo association take over occupancy and rent the place, and you are liable for a lot of other property obligations, like liability for injuries and damage, and ordinance violations and real estate taxes. The property stays in your name until sold by foreclosure or you sell it or short sell it and get it out of your name.

Although the general rule is that you do not file any kind of bankruptcy to give anything up, sometimes people have bought things on credit that are of no use to them anymore. The most common item is a car, perhaps one that has been damaged, or is a lemon. Car finance companies do not want junk cars back, so to get it out of your name we may have to do a motion to redeem it for its junk value and order the finance company to give you the title when you pay them that amount.

When a personal has real estate they want to surrender, there are special problems. Generally, you can only transfer real estate by a deed. You have to give the deed to someone, and maybe they won't want the property back. In Illinois, for instance, you cannot just deed property to another person, or to your mortgage holder, unless they consent to it. In the case of slum property, many mortgage holders don't want the property any more than you do. You cannot just draw up a deed giving them the property, and record it. If they did not consent to receive the deed, they can void the deed and the property will still be yours.

In a bankruptcy, if you want to surrender real estate, we make the same "election to surrender" in writing on the bankruptcy petition, just as in the case of personal property, but it does NOT mean anything except you told the bankruptcy court you don't want it. It is still yours! You cannot deliver the keys to your old 2 flat in a bad neighborhood to the savings and loan, and claim you don't own it any more.

With a car, there is not much at stake. If you surrender it, and the finance company never picks it up from in front of your house, and the city tows it, there is not much at stake. But if you make the election to surrender your rental property, and the bank does not want to assume control over it, and you abandon it, the property will still be there big as life, and you still will be the title holder, even after the bankruptcy. You will have no further obligation on the mortgage, but if the lender does not want to accept a deed in lieu of foreclosure, the property will remain in your name until such time as the bank goes through the foreclosure process to reclaim title. In the meantime, if someone is injured on the property, you may be liable.

Therefore, if you are surrendering real estate, realize that it is best if you arrange for the lender to accept and record a deed to the lender. Then the property is really no longer yours. A bankruptcy will extinguish the debts, but does not get the property out of your name. You may still own property you do not want after a bankruptcy. The bankruptcy will get rid of the debt, but you will have to get the title out of your name.

In any surrender of real estate, list all mortgage and lien holders, as well as the water and sewer bills, and also, if you have a VA loan, list the Veterans Administration on your Chapter 7 or 13 Petition, as well as the person who bought your house. Listing the VA is also important if you have sold a house to someone and they assumed your VA loan. If they ever default in the future, the VA will not be able to come back after you.

If there is any equity in property you are surrendering, the bankruptcy trustee in a Chapter 7 may want to sell it, and then you will not have to worry about it. But if the property is not worth more than the mortgage, the trustee may abandon the trustee's interest, and ownership after the bankruptcy will revert to you. Then you could sell it, or hope the bank forecloses quickly.

In the case of time share or interval ownership vacation condominiums, many people want to surrender these. The market value of these time shares is very low. There is almost no resale market, since the only people selling them or the companies that sold you yours, and they want to sell the ones they own first. So, if you want to surrender a time share, the result you want is not to pay for it any more. In a Chapter 7, that is what happens. In a Chapter 13, even if you "surrender" your time share, you still may have to pay for it if the creditor does not sell it.

Problem: Mr. and Mrs. Harris went to a presentation where they were promised a free tv if they bought a time share resort condominium deal. They did, but never used it, and are unable to pay the $119.99 per month for another 58 months. They listed it for sale 5 months ago, and paid a $300 fee to the listing company, but there have been no offers.

The Peter Francis Geraci Chapter 7 or 13 Solution: Since all of their other debt is charge cards, and they are up to date in their house and cars and have no property that exceeds their "exemptions", they can file a Chapter 7, and be free of the time share and their charge cards. They will continue to pay on their house and cars just as if there was no bankruptcy case ever filed. They will reaffirm that debt.

If you are in a situation where you must file a Chapter 13 Debt Repayment Plan, and are paying back all your bills, surrender of a time share may work differently. Even though you have elected to surrender the collateral, or time share, the time share company may claim that the time share has no market value, and file a claim in your Chapter 13 for the balance due. Therefore, the result is that you end up paying for it even though you want to surrender it. This only happens in some Chapter 13 cases, though. In Chapter 7 cases, there is no further obligation on a surrendered time share