“Surrender” Without Delivery?

Surrender of Collateral Without Delivery?:  Can a debtor “surrender” collateral – and cause a secured claim to be treated as unsecured – without physically delivering the collateral to the creditor (or making the collateral available to the creditor)?

Delivery of Collateral Required If Possible:  Judge Schaaf addressed the issue in the case of In Re Mustafa, Case No. 15-52410 (Bankr. E.D. Ky.,  June 6, 2016 Order) (Doc. #45).  In that case, the debtor no longer had possession of the car he was proposing to surrender (he had sold it and didn’t pay the creditor).  Creditor objected to confirmation, arguing that surrender was not an option if the debtor couldn’t give the car back to the creditor.

The Court said that “surrender” requires physical delivery of the collateral if delivery is possible.  If delivery is not possible through no fault of the debtor, then a debtor’s surrender of all rights in the collateral is sufficient under section 1325(a)(5).

Good Faith An Issue If Delivery Is Not Possible:  The Court held that whether a debtor effectively “surrenders” collateral is very fact-specific and requires good faith on the part of the debtor and the creditor.  Because the debtor in this case has some fault, the Court set an evidentiary hearing to determine good faith.

Alternative To Surrender:  If a creditor objects and the debtor cannot “surrender” collateral for purposes of section 1325(a)(5), I think the only alternative (other than dismissal, conversion, or dealing with a nondischargeable debt) is to pay the allowed secured claim through the plan.  But then the question arises – how do you value collateral if you no longer have possession of it?

The Point Is This:   We frequently see plans proposing to surrender collateral because it’s been lost, stolen, transferred, destroyed, or even awarded to a former spouse in a divorce.  We often take for granted what “surrender” means, but courts across the country have not been consistent in defining  what it means to “surrender” collateral or what the legal effect of “surrender” is.  Practitioners need to be aware of the issues that might arise when a plan proposes a “surrender” of collateral.

In future posts, we’ll talk about whether listing a creditor in the plan under the section for “Surrender of Property” is sufficient to treat the claim as unsecured, and whether the debtor can modify a plan after confirmation to surrender collateral and treat the deficiency claim as unsecured.

 

 

3 comments

  1. I think surrender means physically “surrender” = turnover. But surrender is a 2 way street. The creditor doesn’t have to accept their collateral in return, and I don’t think you can force them to take their collateral back.

    If the client doesn’t have the collateral anymore, that’s not “surrender.” You cannot surrender something that you do not possess.

    I think if you have confirmed plan that surrenders, but the creditor won’t take back the collateral, you then would have grounds to ask the court to have the creditor to release their lien (through either a Motion or an AP – whatever your court requires). The creditor would still have a claim in the Chapter 13, but it would be unsecured at that point.

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  2. Thanks for the comment!!! I agree that the ultimate issue is whether the debtor can treat the claim as unsecured, and what is the appropriate procedure for doing so. Instead of surrendering property you don’t have, can you value the secured claim at $0 to make it unsecured? What is the value of the creditor’s interest in the estate’s interest (under 506) in collateral that can’t be turned over?
    Surrender of real property can be more problematic, especially when the creditor doesn’t take the house back. Another topic to add to my list . . . .

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    1. You’re welcome!
      We let them advertise a nominal value of say $10 secured in their plan, and treat the balance of the claim as unsecured when it is physically impossible to surrender. It’s then on the creditor to object is they think that their is a bad faith reason to do so (like the debtor intentionally destroyed or disposed of the collateral, or is hiding the collateral).

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