I get a lot of clients who have homes, cars, or other assets with loans attached to them. Most typical are auto loans and mortgages. These are known as "secured debt". When a person files bankruptcy they have a choice to make with regard to their secured debt. They can either choose to keep the property (typically by staying current on the payments or reaffirming the debts), or they can Surrender the property back to the lender. Many times, when a debtor is underwater on an asset (owes more than the value of the asset) it is a good idea to surrender the asset back to the lender (ie; give it back) to get out of the bad loan.
When a debtor chooses to surrender a car for example, the creditor would be notified by the Debtor's statement of intent that is filed with the case. This statement tells the creditor what the Debtor plans to do with the car (basically keep or let go). When the Debtor chooses to let the car go the lender will either file a motion for relief from stay so they can come get the car, or wait until the stay expires automatically when the debtor gets their discharge.
Once the creditor gets the car back, they can proceed to sell it at auction. However, if the lender takes a loss on the car, they can't come after the debtor for the "deficiency balance" - the difference between what is owed and what the creditor received at the auction. For example, if a car is repossessed and auctioned off and the borrower owes $15,000 on the loan, but the Creditor only gets $10,000 at auction they would typically send the borrower a nasty bill for $5,000.
However, when the car is taken back and the owner has surrendered it in a bankruptcy the creditor is not allowed to bill or collect on that $5,000 deficiency balance. The bankruptcy will protect the debtor from that bill.
If you are considering bankruptcy it is a good idea to let your attorney know your ideas with your secured debt. If you are looking to get out of a certain secured loan, surrendering the asset in bankruptcy may make a lot of sense.
For more bankruptcy information in Oregon and Washington visit us at www.pacificbankruptcy.com or call 503-352-3690 to set up a free consultation.