When you file for Chapter 7 bankruptcy, you must decide how to handle your "secured debts" or loans you agreed to guarantee with property (collateral). The most common types of secured debts include mortgages and car payments, but other types exist.
If you don't want to keep property serving as collateral for a secured debt when you file for bankruptcy, you can "surrender" it by giving it back to the lender. The bankruptcy case will wipe out your responsibility to pay for the secured debt. If you want to keep the loan in place—and keep the property—you'll need to continue paying the loan. One way to do so is by completing a reaffirmation agreement with the lender.
In Chapter 7 bankruptcy, you must decide how to deal with your secured debts and the property that secures those debts.
You'll find more about options such as reaffirming the debt or redeeming the property in Secured Debt & Property in Chapter 7 Bankruptcy.
When you surrender property in Chapter 7 bankruptcy, you return it to the creditor, and it's the simplest method of dealing with secured debt and property in Chapter 7. The bankruptcy discharge wipes out your personal liability for the secured loan. The property lien will no longer exist because the lender will have recovered the property.
If you decide to surrender an item of property in your Chapter 7 bankruptcy case, you will inform the court of your decision in your bankruptcy papers. You'll do so by completing the Statement of Intention for Individuals Filing Under Chapter 7 form.
You don't have to physically return the property to the creditor—the creditor must collect it. If the creditor doesn't retrieve the property and the trustee doesn't claim it, you keep it. The likelihood of this happening is higher when the property isn't worth much.
Surrendering property can be a good option if:
Find out more about surrendering a car in Chapter 7 bankruptcy.
The most obvious disadvantage to surrendering property is you lose the property. Surrendering might not be an option if you need your car to go to work or attend important doctor's appointments.
A less obvious disadvantage to surrendering property is that some courts won't count your loan payments on property you intend to surrender for purposes of the means test. Because secured payments reduce your available disposable income for qualification purposes, you might have difficulty qualifying for Chapter 7 bankruptcy.
Learn more about the bankruptcy means test.
Bankruptcy works by severing contracts with your creditors. Because your obligation to pay a debt stems from a valid contract, a creditor can't collect the debt without it. However, in some cases, you'll want to continue paying a lender to keep the financed property.
For instance, suppose you're making payments on a vehicle. If you have another form of transportation, losing the car you're buying on credit might not be an issue. But if you need the car to get to work or to take your children to school, then losing it might not be an option.
To get around this problem, you can enter into a new contract—a reaffirmation agreement—with the holder of your auto loan. If both sides agree to the old contract terms or newly created conditions, the bank will draft a reaffirmation agreement and forward it to you for your signature. After you sign, it will be filed with the bankruptcy court.
However, taking additional steps to make the contract binding is necessary. Specifically, you must demonstrate that you can afford the monthly car payment. If represented, your lawyer can attest that the payment will not pose an undue hardship for you (and your family) by signing the reaffirmation form and filing it with the court. Otherwise, the judge will determine at a hearing.
Once the reaffirmation agreement is approved, you'll be legally liable to pay the debt balance. As long as you remain current on your payment, you can retain the property without fear that the lender will repossess it.
Learn more in Reaffirming Secured Debt in Chapter 7 Bankruptcy.
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