Secured Debt in Chapter 7 Bankruptcy – What Are Your Options?
For those who qualify, Chapter 7 bankruptcy can be a very effective way to obtain debt relief in a relatively short period of time. One of the benefits of filing a Chapter 7 bankruptcy is that you can eliminate most unsecured debt, while also keeping your car, personal property and other secured debt through the process of redemption or reaffirmation.
If you are contemplating a Chapter 7 and have secured debt, such as a home mortgage or car loan, you have to make some important decisions. As a Chapter 7 debtor, you have the following options when it comes to secured debt:
- Option 1: Surrender the car or personal property. By surrendering your interest in the property, the debt converts to an unsecured liability that can be discharged through the bankruptcy. After the discharge, you will no longer have to pay this debt.
- Option 2: Redeem the debt by paying the fair market value of the property, subject to approval by the creditor and Court, and then make a lump sum payment before the conclusion of the case.
- Option 3: Reaffirm the secured loan to keep the secured property and continue making payments according to the existing payment plan, as if no bankruptcy had been filed.
- Option 4: Continue paying the debt without redemption or reaffirmation, subject to potential problems with your credit and the lender.
Redemption in Chapter 7 Bankruptcy
Redemption is the process by which you can legally buy back your debt from the creditor to avoid losing the collateralized property. Redemption is typically used for vehicles, where the fair market value of the car is less than the amount owed on the loan.
With redemption, you determine the value of the property (usually from valuation guides, such as Kelley Blue Book or NADA for vehicles). If the lender agrees to the value or you obtain an order from the bankruptcy court confirming the value, you can pay this amount and discharge the balance owed on the loan. Once paid, you will own the car or other property free and clear.
If you’re filing for Chapter 7 relief, you probably don’t have the have the ability to make a lump-sum payment. This is the main drawback to redemption of your secured property. However, there are lenders that can assist with redemption loans. So if the value of your property is far less than the amount owed, a redemption loan could make sense. In many cases, the redemption loan will save you money, and the attorney fees can be spread through the new loan.
Reaffirmation in a Chapter 7 Bankruptcy
Reaffirmation is the process of reaffirming your secured debt and agreeing to continue making payments over the course of the loan’s existing lifespan. When a secured debt is reaffirmed, it’s as if the bankruptcy had never been filed. You will continue making payments until the property is paid off and the title can be transferred to your name.
Reaffirmation is common for vehicles and mortgages. While reaffirmation can help protect these important assets during the bankruptcy process, you will be required to pay the full amount of the loan, regardless of whether it exceeds the property’s fair market value. You will also have personal liability on the loan, despite the bankruptcy discharge. As long as you continue making your payments on time, you can keep the property and avoid issues with the lender.
Redemption Versus Reaffirmation – Why Choose One or the Other?
Whether you choose to redeem or reaffirm your secured debt will depend on your individual, financial situation. In the majority of cases, debtors who do not surrender their property will usually choose to reaffirm their debt and continue making payments over time. While this allows you to keep the property, it also prevents a discharge of the debt. So if you reaffirm and fail to pay the loan in the future, the lender can initiate collection efforts, including repossession and foreclosure, and sue you for any deficiency on the respective loan.
Redemption is not always viable for those seeking debt relief, as liquid assets may be limited. However, if you have the money up front to redeem the property, or you can obtain a redemption loan that makes sense financially, redemption can sometimes offer a better solution than reaffirmation.
You can also continue paying your mortgage and car loans without redemption or a reaffirmation agreement. In most instances, the lender will take your payment, apply this to the balance owed, and release the title when the amount owed is paid. You will not get any credit for these payments on your credit history, but (absent some exceptions) you will get to keep the property and eventually obtain the title.
The law on this issue varies significantly from state to state. Different lenders also have different views when it comes to secured property and the bankruptcy filing. Because of the differing laws and views, it’s important to discuss all options with your attorney before making your decision.
Contact the Westbrook Law Firm For Bankruptcy Help
If you’re contemplating a Chapter 7 bankruptcy and have concerns about your secured debt, our Firm can help.
Our experienced legal can help determine whether redemption or reaffirmation is a good option for your situation. We can also help negotiate the terms of your reaffirmation agreement or redemption motion.
To learn more about the bankruptcy process, including how reaffirmation and redemption can protect your property in a Chapter 7, please call the Westbrook Law Firm today. The road to financial freedom starts here.
- United State District & Bankruptcy Court: Southern District of Texas: Duties and Responsibilities of a Debtor Under Chapter 7 and Attendance at the §341 Meeting of Creditors