Chapter 7 Options For Secured Debts

In Chapter 7 cases, with two exceptions, explained later, you have the following four choices:

1. If the collateral is real estate and your payments are current on the date that you file the Chapter 7, and your equity in the collateral is covered under the exemptions, you may keep the property so long as you continue to make the monthly payments and comply with the terms of your contract. We call this
the “ be-current-and-stay-current” right to retention.

2. Prior to BAPCPA, you also had the “ be-current-and-stay-current” right to retain personal property, such as vehicles. Now, to be absolutely sure you can keep the personal property that secures a debt secured by personal property, you must also sign a reaffirmation agreement. The new law under BAPCPA is not clear, but most experts think that the creditor can repossess the collateral unless you enter into a agreement reaffirming the debt within 65 to 85 days after you file the bankruptcy. We believe, it is not likely that a creditor will in fact repossess collateral when you are current with your payments, but there are no guarantees. We have had some success in selected cases obtaining an order from the bankruptcy court disapproving reaffirmation agreements, but allowing the debtors to keep the collateral, so long as they make the payments.

The reason that you should not want to reaffirm a debt is that the reaffirmation reinstates your personal liability on the debt. This means if you later default on the debt, you will be liable on the debt despite the fact you filed bankruptcy. The decision on whether to reaffirm a debt may be the most important one you make in connection with your bankruptcy. We can advise you, but the final decision is yours. If your payments are not current, you can try to negotiate a reaffirmation agreement with the creditor that allows you to catch up your payments. There are two drawbacks to this option. First, you cannot be sure that you and the creditor will be able to agree upon terms that allow you to catch up your payments. Secondly, as explained above, the reaffirmation agreement reinstates your personal liability. If your payments on a mobile home loan, a mortgage, or a car loan are substantially behind or if the creditor has threatened to repossess or foreclose, you will need to file Chapter 13 to save the property.

3. You may redeem the property by paying the creditor the value of the collateral. The value of a vehicle is the amount for which it would be sold at retail by a used car dealer in its current condition. For example, if you owe GMAC $15,000.00 secured by a vehicle which has a retail value of 10,000, you can pay GMAC $10,000 and keep the vehicle. There are redemption loan financers who lend money to Chapter 7 debtors to redeem vehicle loans. Even though their rates are high, in some cases redemption loans can save you money.

4. Your final option is to give the property back to the creditor (“surrender” the property) and have the debt discharged.

Exceptions

There are two circumstances in which you can keep the property in Chapter 7 even if you don't maintain your payments. These exceptions are:

1. When a creditor has a judgment or lien on property that impairs your exempt interest in that property.

2. When a creditor has a non-possessory, non-purchase-money security interest in exempt personal household items (Televisions, furniture, clothes, jewelry,
tools of the trade, or professionally prescribed health aids). "Non-possessory" simply means the creditor is not physically holding the property. "Nonpurchase-
money" means that the creditor neither sold you the collateral, nor lent you the money with which to buy it. The most common instance in which a creditor obtains a non-possessory, non-purchase-money security interest in household items is when someone borrows money from a finance company and lists certain household items as collateral for payment of the loan.

**The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.**