Malcolm Rivera
When a debtor surrenders collateral in bankruptcy, they give up their right to oppose foreclosure. However, in some cases, the creditor may never come to collect the surrendered collateral. This can lead to legal complications, especially if the creditor attempts to collect money from the debtor for the collateral after the bankruptcy is discharged. In such cases, the question arises as to whether the creditor has legally abandoned the surrendered collateral. This is a complex issue that requires careful consideration of the specific facts and circumstances of each case, as well as the applicable laws and regulations.
| Characteristics | Values |
|---|---|
| Definition of surrender | The debtor's relinquishment of their right to the property at issue, such that the secured creditor is free to accept or reject that collateral. |
| Debtor's obligation | Debtors must "get out of the creditor's way" and not contest the creditor's efforts to foreclose. |
| Creditor's obligation | A creditor is not required to pick up surrendered items but cannot try and make the debtor pay for it later on. |
| Collateral value | For personal property, collateral may be abandoned if the recoverable value is less than $5,000. For real property, this value is $10,000. |
| Evidence requirements | The lender must have sufficient evidence of the value of the property to justify abandonment. For personal property, this can be a personal property appraisal. For real property, an updated real estate appraisal is ideal, but a Broker's Price Opinion may also be accepted. |
| Bankruptcy | In a Chapter 7 bankruptcy, a debtor must surrender the property to the secured creditor. In a Chapter 13 bankruptcy, the creditor has the right to file an unsecured proof of claim and be paid the deficiency balance left on the loan after collateral disposal. |
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What You'll Learn
Secured creditors and liens
Secured creditors are entities that loan money based on collateral, such as vehicles, mobile homes, furniture, and other household items. These creditors hold liens of some kind against the debtor's property. Liens are security interests or legal claims against property that is used as collateral to satisfy a debt. In other words, liens enable creditors to assert their rights over the debtor's property.
There are several types of liens that secured creditors can use to get at the debtor's assets to satisfy a debt. These include purchase-money security interest liens and non-purchase-money security interest liens. In the case of the former, the creditor extends credit to the debtor specifically for the purchase of the property that secures the debt. Examples include a first mortgage on a home or a car loan. In the latter case, the debtor puts up property they already own as collateral for a loan, and the loan proceeds are used to pay expenses or buy other property. Examples include a second mortgage on a home or a loan used to pay operating expenses with previously owned office equipment put up as collateral.
Another type of lien is a statutory lien, which can arise when a contractor or mechanic performs work on property and is not paid. For instance, if an auto mechanic performs repairs to a car, they have a security interest in the property. If the owner tries to sell the property, the debtor will have a secured interest in the portion of the proceeds needed to pay the debt.
In the case of bankruptcy, if a debtor agrees to surrender collateral to a creditor, the creditor may repossess the item, and once they have their security back, the debt becomes an unsecured debt. However, a creditor is not required to pick up surrendered items, and they cannot try to collect money from the debtor for the collateral after bankruptcy is discharged. In some cases, a secured creditor may decide to abandon the collateral.
In the United States, there are specific guidelines for when collateral can or should be abandoned by a lender. For personal property, collateral may be abandoned if the recoverable value is less than $5,000, and for real property, if the value is less than $10,000 per parcel. Lenders must have sufficient documentation, such as an appraisal or valuation, to justify the abandonment.
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Collateral recovery costs
For example, in the case of personal property collateral such as equipment and inventory, the recovery costs may include the fees for a professional collateral recovery service, transportation and storage costs, appraisal or valuation fees, and any legal fees associated with the recovery process. If the collateral has been abandoned or is difficult to locate, there may be additional costs involved in locating and taking possession of the collateral.
In the case of real property collateral, such as land or buildings, the recovery costs may include real estate appraisal fees, legal fees, and any costs associated with maintaining and securing the property. In some cases, the recovery costs for real property can be significant, especially if the property is in a state of disrepair or requires ongoing maintenance or management.
To mitigate collateral recovery costs, lenders may consider specific guidelines, such as those provided by the SBA for personal and real property collateral. For instance, the SBA guidelines state that personal property collateral may be abandoned if the recoverable value is less than $5,000, while for real property, the threshold is $10,000 per parcel. In such cases, the lender must provide sufficient documentation to substantiate the abandonment, including updated appraisals or valuations.
Additionally, there are regulatory frameworks in place, such as the Collateral Recovery Act in Illinois, which regulates the business of collateral recovery and establishes requirements for repossession agencies and their employees. This includes the licensing and permitting process for individuals and entities engaged in collateral recovery, further impacting the costs associated with these services.
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Bankruptcy and debt discharge
A bankruptcy discharge releases the debtor from liability for certain types of debts. This means that the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors from taking any collection action, including legal action and communications with the debtor.
There are different types of bankruptcy, and each has its own rules regarding debt discharge. For example, in a Chapter 7 bankruptcy, the main purpose is to discharge unsecured debt. If you owe secured creditors, you must decide whether you can afford to keep the collateral or surrender it to the lienholder. In a Chapter 13 bankruptcy, all debt is consolidated into one monthly payment, and the creditor has the right to file an unsecured proof of claim and be paid the balance left on the loan after the collateral is disposed of.
It is important to note that not all debts are discharged in bankruptcy. There are 19 categories of debt excepted from discharge under Chapters 7, 11, and 12, and a more limited list of exceptions applies to Chapter 13. Debts incurred by fraud or criminal acts, such as drunken driving or injuring someone while driving under the influence, are generally not dischargeable. Student loans are also not automatically discharged, and debtors must file an adversary proceeding to prove that repayment would cause undue hardship.
In some cases, collateral may be surrendered but not picked up by the creditor. Even if the creditor fails to repossess the collateral, the lien on it will still exist, and the creditor can enforce their right to pick it up. However, the creditor cannot try to collect money from the debtor for the collateral after the bankruptcy is discharged, as this would be a violation.
When a creditor refuses to take surrendered collateral, it can result in legal proceedings. In such cases, the court may sanction the creditor for failing to release the title to the collateral without full payment of the debt, especially if the refusal is deemed coercive and violates the discharge injunction.
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Foreclosure and opposition
When a debtor surrenders collateral in bankruptcy, they give up the right to oppose foreclosure. This means that debtors must not contest the creditor's efforts to foreclose and must "get out of the creditor's way".
In the case of In re Pratt, 426 F.3d 14 (1st Cir. 2006), the creditor was sanctioned for failing to release the title to a vehicle without full payment of the debt after determining that the vehicle was not worth repossessing. The debtor was prevented by state law from junking the vehicle without the title. The Court determined that the creditor's failure to repossess the vehicle or release the lien was objectively coercive and violated the discharge injunction.
In another case, In re Deemer, 2019 Bankr. LEXIS 1840, case #14-12353-BPC (Bankr. M.D. Ala. 17 June 2019), the debtor surrendered a vehicle that was inoperable. When neither of the creditors involved repossessed the car, the debtor filed a motion for contempt and sanctions. The Court held a hearing on the motion, and the debtor received the title to the vehicle.
In the case of In re Failla, the debtors filed for Chapter 7 bankruptcy protection and agreed to "surrender" their house instead of claiming it as exempt, redeeming it, or reaffirming their debt. The bankruptcy trustee "abandoned" the property back to the debtors, but they opposed foreclosure. The bankruptcy court granted a motion to compel the debtors to surrender the property, and the district court affirmed.
The Eleventh Circuit has interpreted the meaning of "surrender" under section 521(a)(2) of the Bankruptcy Code as requiring debtors to actually surrender the property and not just surrender it to the trustee. This interpretation is based on the text and context of the statute, which distinguishes "surrender" from "vesting" or transfer of ownership.
In the context of SBA loans, there are specific guidelines for when collateral can or should be abandoned by a lender. For personal property, collateral may be abandoned if the recoverable value is less than $5,000, and for real property, if the value is less than $10,000 per parcel. The lender must have sufficient documentation to substantiate the abandonment, such as an appraisal or valuation of the property.
In summary, when a debtor surrenders collateral in bankruptcy, they give up the right to oppose foreclosure and must not contest the creditor's efforts to take possession of the collateral. There are legal consequences for both debtors and creditors who do not comply with their obligations in these situations.
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SBA approval and requirements
The Small Business Administration (SBA) has specific guidelines and requirements for the abandonment of collateral by a lender. For personal property (equipment, inventory, etc.), collateral may be abandoned if the recoverable value is less than $5,000. The lender must provide sufficient documentation to substantiate the abandonment, including a personal property appraisal or valuation reflecting the value of the collateral.
For real property, collateral may be abandoned if the recoverable value is less than $10,000 per parcel. Again, the lender must provide sufficient evidence of the value of the real property to justify the abandonment, typically through an updated real estate appraisal or, in some cases, a Broker's Price Opinion.
If a lender has already acquired title to collateral and wishes to abandon it, they must obtain written pre-approval from the SBA. This can be done by submitting a request to the appropriate SBA Commercial Loan Servicing Center.
In terms of liquidation, the SBA expects lenders to diligently pursue recovery of liens and any associated expenses should be allocated by lien priority. When it comes to litigation, lenders must submit a litigation plan for prior approval for non-routine litigation or litigation involving estimated legal costs exceeding $10,000. The SBA should not be named as a plaintiff in any case, and lenders must ensure there are no conflicts of interest. Additionally, legal fees and invoices submitted for payment must be detailed and itemized.
The SBA also has requirements for the approval of fees and litigation plans, including the review of attorney's fees and legal bills to ensure they are necessary, reasonable, and customary. Any expenses deemed unreasonable or unnecessary will be deducted from any purchase request or reimbursed by the lender.
It is important to note that the SBA will only recognize other lender priority liens if they have been properly perfected and prior written concurrence has been received from the SBA. Lenders must also ensure that they do not confer a preference upon themselves in terms of recovery compared to an SBA-guaranteed loan.
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Frequently asked questions
Collateral is a property or item of value that is pledged by a borrower to a lender as a security for a loan. If the borrower defaults on the loan, the lender can take possession of the collateral to recover their losses.
Surrender is when a debtor gives up their right to a property or item of value that was pledged as collateral for a loan. The secured creditor then has the option to accept or reject the collateral.
Abandonment of collateral occurs when a lender decides to give up their rights to the collateral and does not repossess it. This usually happens when the value of the collateral is less than the cost of recovering it.
If a creditor refuses to take possession of surrendered collateral, the debtor may be able to file a motion for contempt and sanctions. The creditor may also be sanctioned for failing to release the title to the collateral without full payment of the debt if it is determined that the collateral is not worth repossessing.
