If you have obtained a loan at a finance company it is important to understand that in a bankruptcy some of the items pledged (items listed that you did not use the money borrowed to purchase but that you told the creditor about so they could list them as collateral) can be avoided or protected under Bankruptcy Law. These items are:
- 1 Radio
- 1 TV
- 1 VCR
- Educational materials used for minor children
- Medical equipment and supplies
- Furniture exclusively for the use of the minor children or elderly or disabled
- Personal Effects including toys and hobby equipment of minor children and wedding rings.
- 1 Personal Computer and related equipment
The Bankruptcy Law specifically states these things are not avoidable:
- Works of Art (unless created by the debtor or a relative of the debtor)
- Electronic Entertainment Equipment with a value of over $500
- Antiques worth more than $500
- Jewelry worth more than $500 (except the wedding rings)
- Motor Vehicles, Boats, Recreational devices
- Lawn mowers
If your creditor asserts you have pledged something that is not avoidable from the first list, you have three options:
Keep the Item and Pay for It
In a Chapter 7 bankruptcy you must keep making the normal monthly payment at the interest rate agreed upon when you borrowed the funds, unless a lower interest rate or amount to pay back can be negotiated. In a Chapter 13 bankruptcy you must include the creditor and items pledged in your plan and pay the value of the item at a reasonable interest rate. In a Chapter 13 the Creditor can disagree with the value and if that is the case there would be a trial on what the items are worth.
Surrender the Collateral
You could surrender the collateral and the creditor will get permission to come get the items. Many times the creditor does not actually collect the items, but they have the right to do so. You would need to cooperate with the creditor if they call you to come repossess the items.
Redeem the Collateral
In a Chapter 7 bankruptcy you can propose to redeem the collateral. Redeeming is paying the fair market value of the collateral, not what you owe on the debt. Be sure to tell your attorney what you believe you could sell the items for (yard sale, craigslist, pawn shop, etc.) when you go over the paperwork for preparing the petition. Your attorney then will file a motion to keep the items and pay the value in one lump sum. The creditor can object to the value you state. If there is an objection, then the Bankruptcy Judge will have a trial on what the value of the items pledge that cannot be avoided is worth and will determine what you must pay to keep the item.