Debtors have three options when it comes to secured assets in a Chapter 7 bankruptcy. The first option may be the most obvious: Surrender. The option of surrender gives the debtor the ability to simply give up their interest in the secured property and pass it back to the creditor.
The next option is to Reaffirm. To Reaffirm a debt, the debtor offers the creditor a contract to allow the debtor to keep the property, often with the same terms as the original agreement. This allows the obligation to “go through” the bankruptcy and often enables debtors to keep their financed cars or homes. However, it is important to note that it is up to both the creditor and debtor to come to this agreement. If for some reason the creditor doesn’t want to reaffirm the debt, no one can make them. For this reason I make sure to advise my clients to be sure they’re up to date on all payments on these secured items going into the bankruptcy to induce the creditor into agreeing. Typically, these agreements do work out.
The final and least used option is Redemption. Redemption is the debtor’s right to purchase the secured property for it’s fair market value at the time of filing. It is important to note that this is not the agreed upon amount in the contract. You may owe $3,800.00 on a car, but if it’s only worth $1,000.00 on the day you file, you can pay the $1,000.00 and satisfy the debt to the creditor. The problem with this option, which is why it’s least used, is that very few people who are bankrupt can come up with the additional money. Still, it is better to have options you have little chance of using than have no options at all. I have also heard of some third-party financing companies who will pay off your Redemption amount if you sign a secured note with them. I have never actually seen this work out for the debtor and it seems counter-intuitive to begin a bankruptcy with a new debt, but as I said before, options are good.
If you think you need a bankruptcy and would like to discuss your options going forward, please contact me at 904-685-1200 and schedule a free consultation.