- Surrendering Property in Michigan Bankruptcy
- Property Surrender in Chapter 7 Bankruptcy
- Property Surrender in Chapter 13 Bankruptcy
- Timeshares: Real Estate or Not?
- Surrendering a Timeshare in Chapter 7 Bankruptcy
- The Successful Chapter 7 Timeshare Surrender
- Surrendering a Timeshare in Chapter 13 Bankruptcy
- Timeshare Surrender Problems
- How to Surrender a Timeshare in Bankruptcy: The Bottom Line
It is not difficult to surrender a timeshare in bankruptcy. Or is it?
It shouldn’t be difficult, in any case. Surrendering any property, particularly in Chapter 7 bankruptcy, is normally straightforward. You list the timeshare in your schedules as a property interest. You list the related secured or unsecured debt in your other schedules. And, voila!
It’s gone. The Chapter 7 Trustee sells it off, or, in Chapter 13 bankruptcy, the timeshare community forecloses or offers a deed-in-lieu of foreclosure. The timeshare is off of your hands, forever, along with all related debts owed discharged in the bankruptcy.
In actuality, surrendering a timeshare in bankruptcy doesn’t always work out so neatly.
This Article will explore the thorny issues related to surrendering a timeshare in bankruptcy.
First, however, a basic question: How does surrendering any property work in bankruptcy, and why?
Surrendering Property in Michigan Bankruptcy
When you file for Chapter 7 or Chapter 13 bankruptcy in Michigan, you may elect to surrender property. The question of to whom you actually surrender the property differs from Chapter to Chapter, but the ability to do so is common to both forms of consumer bankruptcy.
Typically, surrendered property is of high enough value that it cannot be “exempted” in Chapter 7 bankruptcy or it is real estate or a vehicle that costs more than it’s worth to keep. However, technically, any property may be surrendered.
Congress included this mechanism as a means of easing and increasing the repayment of your creditors through the bankruptcy process.
Property Surrender in Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” your non-exempt assets are sold off by the Chapter 7 Trustee assigned to your case. This is done to generate a pool of funds from which creditors can be repaid.
Note that the process of exempting, or protecting, assets that you wish to keep is discussed in detail in other posts in our bankruptcy blog.
Suffice it to say, for purposes of this Article, that, when you file for bankruptcy, you create a “Bankruptcy Estate.” In your petition, you must list your assets and their values. Along with each property item listed, you have the option of attaching an “exemption” that may remove the property from the Bankruptcy Estate if the property is not too valuable.
The exemptions are statutory language in the US Bankruptcy Code and in Michigan State law. There are different exemptions for different types of property, each with a different dollar-value cap. Some types of property have no exemption protecting them at all.
If property is fully exempted, it is essentially removed from the Bankruptcy Estate. The Chapter 7 Trustee may only seize and liquidate property that is in the Bankruptcy Estate. It’s safe, in other words.
To surrender property in Chapter 7 bankruptcy, you simply list it, with its corresponding value, and list no exemption along with it.
The Chapter 7 Trustee will consider whether or not to liquidate the property depending on whether or not it can be sold for a profit. A Chapter 7 Trustee can only liquidate property if its sale benefits your creditors rather than loses money.
Property Surrender in Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is known as “reorganization bankruptcy.” It is not a liquidation bankruptcy as is Chapter 7.
In Chapter 13, your debt is reorganized and a repayment plan is drafted by your bankruptcy lawyer, filed with the US Bankruptcy Court, and, then, approved by the Court if no objects are filed and upheld.
When you surrender property in a Chapter 13 bankruptcy, it is surrendered not to the Chapter 13 Trustee but directly back to the creditor to whom it has been pledged as collateral.
In Chapter 13 bankruptcy, there is no other property liquidation mechanism in play. If you own valuable art or antiques or jewelry that has not been pledged as collateral for some secured debt but is simply too valuable to exempt—you don’t lose it. It is not surrendered at all. Instead, you simply are required to repay its non-exempt value to your creditors through your Chapter 13 Plan.
Only property that is pledged as collateral for a secured debt or is leased can be surrendered in Chapter 13 bankruptcy.
You accomplish this by listing the secured debt as “Surrendered” (or, if leased, the contract or lease as “Rejected”). It is then the secured creditor’s job to foreclose or otherwise legally reclaim or re-occupy the property pursuant to Michigan’s or whatever state’s law applies.
In Michigan, this would mean that, say, a home that is surrendered would still be foreclosed. However, any “deficiency debt” resulting from a lowball auction of the property at the county sheriff’s sale would be included in the Chapter 13 discharge.
It is important to note that, in Chapter 13 or Chapter 7, there is no rule or other requirement in the Bankruptcy Code, the Federal Bankruptcy Court Rules, or the Eastern District of Michigan Bankruptcy Court’s Local Court Rules that require a secured creditor to foreclose or take possession of surrendered property within any fixed timeframe. Or at all.
Timeshares are sometimes located in Michigan. Most of the time, they are located in more interesting places, such as Florida or Hawaii.
Depending on the state law that is applicable to the specific timeshare community and depending upon the contracts and agreements you signed when you purchased your timeshare interest, your timeshare ownership may or may not be a possessory interest in real estate.
The question will be whether the timeshare purchase included the signing and recording of a deed. In Michigan, this means that the deed would be recorded and registered with the Wayne County, Oakland County, Macomb County, or other county’s Register of Deeds.
If your timeshare purchase only included the signing of a contract that gave you the right to occupy a timeshare—and perhaps not even a specific unit at a specific geographic address—you may only have a contractual or lease-right to use someone else’s property. The property is actually owned by the timeshare community.
If you’re not sure which sort of timeshare interest you hold, you will need to retain an experienced Michigan bankruptcy attorney or real estate attorney to review your ownership documentation.
The important take-away is that your timeshare ownership interest could be either sort of interest.
Depending on which sort you have, the actual means of surrendering the property in Chapter 7 or Chapter 13 will vary.
If your timeshare interest is a real estate ownership interest, it must be listed on Schedule A/B of your Bankruptcy Petition as real estate.
This is true in Chapter 7 or Chapter 13 bankruptcy.
The corresponding secured debt owed related to the purchase loan made for the timeshare would be then listed on Schedule D (“secured debts”). Any late fees or penalties might, depending on the preference of your Michigan bankruptcy lawyer, might also be listed on Schedule F (“unsecured debts”).
The Chapter 7 Statement of Intent
In Chapter 7 bankruptcy, you are also required to include in your filing documents something called a “Statement of Intent.” This form allows you the opportunity to notify the Court and your creditors of your intention to either retain or surrender property pledged as collateral for secured debts. It also allows you to notify parties of your intent to “assume” or reject a contract or lease.
The Statement of Intent must be filed, but it is not binding upon you. If you change your mind about whether to retain, surrender, assume, or reject something, it can be amended. Or not.
This Statement also requires that you disclose an intent to “reaffirm” or not any property pledged as collateral for a secured debt.
A thorough discussion of the Chapter 7 reaffirmation process, especially as regards automobile loans in the Eastern District of Michigan, is outside the scope of this Article.
In brief, however, a signed reaffirmation agreement that is filed with and approved by the Bankruptcy Court puts you “back on the hook” for a secured debt as if you had never filed bankruptcy at all.
Any secured debt that is not reaffirmed within 45 days of your 341 Meeting of Creditors hearing is legally “surrendered,” even if you physically retain the property and continue to pay for it and the secured creditors allows you to do this. (You can always walk away free and clear from a non-reaffirmed debt.)
If you do all of these things with a timeshare in Chapter 7, you will have surrendered it.
First at bat will be your Chapter 7 Trustee. He or she will review the value of the timeshare and determine whether or not a profit for the creditors of your Bankruptcy Estate can be generated from its seizure and sale.
Usually not. No matter how much you paid for your timeshare, the sad news is that the same timeshare interest can probably be purchased on Ebay for $1.
They are very difficult if not impossible to sell for any appreciable value.
If the Chapter 7 Trustee is not interested in dealing with it, he or she will file a “Report of No Distribution” (assuming you don’t have any other valuable assets of interest) with the Court and walk away.
If the timeshare is a property interest, a foreclosure or other state law-based possession action will be required of the timeshare community to remove it from your hands entirely.
If it is not a property interest, you’re just done. The liability is gone.
In Chapter 13 bankruptcy, as noted, you would either list the timeshare as “surrendered” if a property interest or “reject” if a contractual interest in your Chapter 13 payment plan to surrender it.
If you don’t list it anywhere in your petition or Plan at all—it isn’t surrendered or discharged. In Chapter 13 bankruptcy, it is very important to capture all debts owed.
If it is not a property interest and you properly reject any contract or lease, whatever you owe to that timeshare community will be treated as a non-priority unsecured debt. It will be paid last after all other “priority” creditors in your Chapter 13 plan, along with credit card, medical, back-rent, and other such debts.
Whatever you owe “on paper” at the end of the Chapter 13 process will be totally discharged just as those other unsecured debts will be.
If the timeshare is a property interest and is properly surrendered in the Chapter 13 plan, the timeshare community will need to foreclose as required by state law to reclaim possession.
What if it doesn’t? Remember what we said, above, about the lack of any rule requiring a secured creditor to foreclose?
This would be fine if you didn’t mind keeping surrendered property. But a timeshare comes with fees and other obligations, not to mention the burden of feeling like you have to spend every vacation in Orlando. God forbid you ever get to visit Paris or anywhere else, right?
There is a reason why you can buy timeshares on Ebay for $1.
What do you do if the timeshare won’t step up to bat?
When a secured creditor of any sort refuses to foreclose on surrendered property, this presents an issue. Along with continued legal (by recorded deed) ownership and occupation comes continuing obligation.
For stand-alone homes and other “actual” real estate, this means a continuing obligation to maintain the property (or, as in Detroit, face possible misdemeanor criminal charges for environmental ordinance violations) and pay utility and property taxes.
If property taxes aren’t paid, the municipality will eventually foreclose. With timeshares, however, this is not usually a possibility.
The last thing you want to is to have a timeshare community send a collections lawyer after you for post-bankruptcy association, maintenance, and annual fees for a timeshare property interest that you thought you’d surrendered.
If the timeshare community does not foreclose within a reasonable amount of time, you will need the assistance of a good Michigan bankruptcy attorney to take further steps.
These steps may include:
- Reopening the bankruptcy case to file a motion for contempt and sanctions;
- Negotiating a deed-in-lieu of foreclosure;
- Simply communicating with, likely, a large corporate timeshare company to remind them o the surrender. (Often, the left hand is ignorant of the right hand’s activities in larger corporate structures.)
If the timeshare interest is not a property interest and has been fully surrendered and discharged, post-discharge collections activity can be the basis for a motion for contempt and sanctions in Bankruptcy Court.
The bottom line is that surrendering a timeshare in bankruptcy in Detroit or elsewhere in Michigan should be a simple process. But it must be done properly, and it can be an issue that doesn’t go away as it should after the bankruptcy concludes.
If you own a timeshare, whether you wish to retain it or surrender it, you should seek the assistance of an experienced bankruptcy attorney to assist you with your Chapter 7 or Chapter 13 case.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully assisted thousands of Metro Detroit Chapter 7 and Chapter 13 clients for over 30 years.
Contact us now to schedule your free bankruptcy consultation.