KEEPING PROPERTY IN A CHAPTER 7 BANKRUPTCY
August 17, 2016 | BANKRUPTCY
One of the considerations you will face as you and your attorney at The Nesbitt Law Firm determine whether a Chapter 7 bankruptcy filing is right for you, is how a Chapter 7 filing will affect the property you own.
The property that you own, but are still making payments on is called collateral and the loan is called a secured debt. In Chapter 7, you have three basic options regarding collateral of a secured loan: reaffirm, redeem, or surrender.
What does it mean to reaffirm, redeem, or surrender secured collateral in Bankruptcy? What should you do? Read on.
As you may be aware, a bankruptcy filing is often called a fresh start. The purpose of a bankruptcy is to eliminate all debt that the Bankruptcy Code allows you to. The legal term for this is a discharge. If the bankruptcy code allows the debt to be discharged, at the end of the bankruptcy case, the debt is discharged. There are some exceptions to discharge. If you are interested in learning about exceptions to discharge, click here.
Often, in an initial consultation, a client will tell me that they do not want to file bankruptcy on their car, or their house, or the debt he owes to Aunt Judy. My response, however, is that he does not have a choice. The bankruptcy code requires that you list all debt that you owe, no exceptions. If you owe it, you list it. From there, however, you can choose to reaffirm on the debt, which basically means that you sign an agreement with the person or company to whom the money is owed before the case was filed, stating that you agree to be held liable for the debt even after the bankruptcy case is discharged. Why would you do this? Good question, most of the time you will not. However, for some loans, you will choose to reaffirm, or otherwise remain on the hook for repayment. For example, on a car loan when you wish to continue payments and keep the car, you may choose to reaffirm the debt. Let’s look at the various options, specifically, those in a Chapter 7 case.
A reaffirmation is a type of novation, an agreement to be bound by the terms of a loan originated prior to the bankruptcy filing. Most of the time, the terms of the reaffirmation agreement will restate the terms of the original loan and reaffirm them, hence the term reaffirmation. Basically, the original contact you signed with your lender will remain in place. Sometimes, the contract terms can be changed a little, depending on the creditor’s willingness to bargain.
In order to qualify for a court approved reaffirmation, the debtor (the person filing bankruptcy) must be able to show that there is no undue hardship that will negatively impact his fresh start or cause an inability to continue repayment on the proposed reaffirmed debt. The reaffirmation offered by the creditor and filed with the court will not only set forth the terms of the proposed reaffirmed loan but will also show the court why the debtor can afford to repay the debt in the future without causing an undue hardship.
If you sign a reaffirmation agreement in your bankruptcy case and then change your mind, you have 60 days from the date it is filed with the court to cancel it. After that time, a reaffirmation becomes irrevocable.
A redemption is a Chapter 7 concept that allows a debtor to retain his secured collateral while paying less than what is owed on the balance of the loan. This is possible when the debtor can prove to the court that the amount he owes on the loan exceeds the actual fair market value of the property. I.e., you owe more on your vehicle loan than the vehicle is worth.
Surrender means that you give the property securing the loan back to the creditor. I.e., you give your car back to Chase Bank. By surrendering the property, you no longer have possession of it and are no longer liable for the debt related to the property.
To determine whether a Chapter 7 bankruptcy filing is right for you, and to discuss your intention as it relates to your secured property, contact The Nesbitt Law Firm today. In your one-on-one individual consultation, we will discuss all of your options and together, we can decide the best course of action to allow you to move forward, keep the property you want to keep and eliminate your debt.