I am often told by clients at the initial consultation that they do not want to include the house or car in their bankruptcy. However, this is not possible, as all assets and all debts are required to be listed in your bankruptcy schedules, or else you will be subject to bankruptcy fraud. What clients really mean is that they do not want to lose these items, and are concerned that if they file that these items will be taken from them. That is rarely the case, as Debtors are provided certain exemptions in bankruptcy that will often allow them to retain most, if not all, of their property. If a Debtor is over the allowable exemption limits, and the Trustee is not likely to abandon the asset back to the Debtor, then the Debtor always has the option of filing a Chapter 13 case instead of a Chapter 7, and paying the non-exempt amount over a 3 – 5 year period, and will be able to retain the asset. (See here for a description of the difference between these two bankruptcy Chapters.)
As indicated previously, all debts need to be listed on the Debtor’s bankruptcy Schedules, regardless of whether or not they are secured, unsecured, or priority debts. In a Chapter 7, with most secured debts, you have three basic options: reaffirm the debt, redeem the property for the market value, or surrender the property to the creditor.
Reaffirmation: A reaffirmation agreement is a legally enforceable agreement to repay all or a portion of a debt. In order for the agreement to be valid, both you and the creditor must sign the agreement, as well as either your attorney or the Judge. Once all parties have signed the agreement it must be filed with the court prior to the deadline issued by the Court. This agreement basically re-instates the debt with the exact same principal balance, interest rate, and other terms, as if a bankruptcy was never filed. In order to do this, you must be current on the loan at the time of filing, and remain current on the loan throughout the bankruptcy! If you fall behind, the creditor can file a Motion to Lift the Stay (which will be allowed by the court if you are truly behind on payments), which will only add attorney’s fees and costs for the Motion onto your debt! The creditor may also refuse to enter into the reaffirmation agreement altogether if you fall behind, and you may lose the ability to retain the collateral!
A creditor that has a debt secured by an interest in real property (e.g., a house) cannot foreclose on the property simply because you chose not to reaffirm the debt. However, the creditor may elect not to send you statements and may chose not to report payments to credit reporting agencies.
A creditor that has a debt secured by an interest in personal property (e.g., a car) may repossess the property if you have not entered into a reaffirmation agreement or redeemed the property within 45 days of your creditors meeting.
In order for the reaffirmation agreement to be valid either your attorney or the judge has to approve it. Your attorney must sign a declaration that they believe that the agreement does not impose an undue hardship on you or your dependents. Often attorneys will not sign off on the Reaffirmation Agreement if your budget does not support the position that you can afford the payments, or if the interest rate is unreasonable or the value of the property is significantly less than the amount owed on the debt. If your attorney will not sign the Agreement, the Reaffirmation Agreement will be set for hearing for approval by a Judge. The Judge will explain to you the consequences of reaffirming, and ask you several questions about your ability to afford the payments, and whether or not you are current on the loan. The judge will ultimately decide whether or not to approve the reaffirmation agreement at that hearing. Such a hearing may also be required at the judge’s discretion if he deems that the value of the item is not worth the amount you are reaffirming, your income does not meet your expenses, or any other factor that the court deems is questionable and desires your appearance. If you do not appear at a reaffirmation hearing, if required, the reaffirmation agreement will not be approved.
Once you have gone through this process, the creditor cannot repossess the property unless you are in default on your contract (e.g., behind on the payments or don’t have insurance). Debtors who timely enter into Reaffirmation Agreements and stay current with their loan payments may keep their cars even if the bankruptcy court does not approve the reaffirmation agreement.
If you do not reaffirm a debt, the debt itself will be discharged at the end of your bankruptcy, however the lien on the collateral still survives. The creditor may be able to foreclose on their lien or repossess the collateral to be able to sell it and obtain the proceeds. However, the creditor will not be able to pursue you for the debt, or any deficiency if the property sells for less than the balance that was owed.
Redemption: You can also choose to redeem the property by paying the creditor the current market value of the property instead of what is owed. This has to be done by Motion filed with the Court, and the Debtor is generally required to pay the redemption amount in one lump-sum payment to the creditor during the bankruptcy. This is a good option for Debtors who owe a lot on something that is now worth very little. However, since it must all be paid in a lump-sum, this is rarely an option in cases where the market value of the item is very high. It is also difficult to get a new lender to agree to finance a new loan for the item when you are in the middle of a bankruptcy, but it is possible and you can attempt this.
Surrender: The third option is to surrender the property and walk away free and clear. The creditor gets the collateral and is free to sell it and get what they can, but the debt owed by the Debtor to them is discharged in the bankruptcy.
Avoidance of liens: There is also a fourth option, in cases where the Debtor has put property down as collateral for a loan that they already owned prior to the loan being made. An example of this is a cash advance company which asks the Debtor to sign a document which makes his existing household furniture and electronics collateral for the loan. These types of loans impair the exemption the Debtor has in his personal effects, and thus this lien can be avoided by filing a Motion with the Court. Avoiding the lien on this property makes the debt then unsecured and dischargeable in bankruptcy. Again, the date of the loan must be more than 70 days prior to the bankruptcy filing in order to be dischargeable.
In a Chapter 13, you will be paying your regular monthly mortgage payments outside of the Plan, while any arrearages you owe at the time of filing will be paid inside the Plan. Cars are usually paid for inside the Plan, and depending on the finance date of the loan, the principal balance and/or interest may be able to be reduced. Other property liens may be “crammed down” to market value and paid over time at a reasonable interest rate inside the Plan. “Cram down” plans are available for vehicles that have been financed for more than 910 days (2 ½ years), and for other personal property where the loan is older than 1 year. You can also opt to surrender property in a Chapter 13, but the difference between the amount you owe and the amount the item is worth becomes an unsecured debt, and depending on your income, you may be required to a portion to unsecured creditors in the Plan.
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