When someone files chapter 7 bankruptcy and owes money on a secured debt (i.e., car note, furniture loan), they must make a decision by stating their intentions on what they want to do with the collateral securing those type loans. The options to choose from are:
Reaffirm the debt and keep the collateral
To reaffirm a debt, one must sign a reaffirmation agreement, a contract, agreeing to pay the debt back at the terms outlined within the reaffirmation agreement. The reaffirmation agreement is filed in your bankruptcy case to let the court know that you intend keep the property and continue to pay for that debt associated with such property. If your budget does not show that you can afford the payment, the court will need to approve the reaffirmation agreement. By signing the reaffirmation agreement, you are agreeing to have that debt survive your bankruptcy discharge which means if you cannot pay the debt after your discharge, the creditor can still collect the debt from you. It is very important to weight your options before signing the reaffirmation agreement. Often, I have the clients contemplate the following questions before signing the agreement:
- Do you need the particular collateral securing the loan?
- Will the creditor take action to get the property back if you choose not to pay for it?
- Are you able to replace the property at a cheaper price than what you would pay the creditor if you reaffirm the debt?
YOU ARE NOT REQUIRED TO SIGN A REAFFIRMATION AGREEMENT. The decision to sign a reaffirmation agreement is 100% yours to make.
Redeeming the property from the creditor
To redeem the property from the creditor, you will usually pay one lump-sum payment to the creditor to buy the property back. This option is ideal when the property is valued much less than the balance still owed on the debt. To be able to redeem property, the following conditions must be met:
- the debt is a consumer debt,
- secured by goods used for personal or household reasons,
- that is tangible personal property (something you can touch), and
- the property is exempt or the trustee has abandoned the property due to it having little or no value.
Retain the collateral and pay on the loan voluntarily
This option is used quite often with mortgages. This option allows someone to keep the property and pay for the debt associated with such property without still being personally liable for the debt. If in the future, you wish to surrender the collateral, the creditor cannot collect the debt from you because it was discharged in your chapter 7 because you did not reaffirm the debt.
You might be thinking, why even have any other options since this option is ideal for all situations. Well, the answer is simple, not every creditor is going to allow you to do this. Some creditors on personal property (i.e., automobile loans) require that you sign a reaffirmation agreement if you intend on keeping the property. The creditor may not allow you to retain and pay for the collateral. Thus, if you fail to reaffirm the debt in those situations, the creditor may repossess the collateral once it is allowed to do so.
When you choose this option, your payment history will not be reported on your credit report since the debt is discharge through your chapter 7. Also, if you later need to make arrangements for payments or modify the loan, the creditor will likely not work with you since it would be violating your discharge order by attempting to collect a debt.
Surrendering property back to the creditor
You would choose this option if you no longer wanted the collateral and did not wish to pay the debt. By surrendering the property back to the creditor, the debt is discharged and the creditor is not able to collect on the debt associated with any remaining balance owed. Also, after the creditor takes possession of the collateral, you are no longer liable for the property.
Mary Pool is a shareholder of the Bond & Botes Law Offices in Montgomery and Opelika, Alabama. She holds a Bachelor of Science from Auburn University at Montgomery, and a Juris Doctorate from Faulkner University’s Jones School of Law. She has represented thousands of clients over her more than 11 years working in the bankruptcy field. Read her full bio here.