Chapter 7 Bankruptcy and Collateral Recovery

When you file for personal bankruptcy, all lawsuits are stopped or “stayed”.  However, with secured debts, such as mortgages or car loans, the lender, or creditor, can file to get permission from the Bankruptcy Court to lift the stay to recover the debt.

Those motions will generally be allowed so the debtor should decide prior to filing for bankruptcy what his or intention is.

What is the Statement of Intention Regarding Secured Property in Bankruptcy?

In your Bankruptcy Petition and Schedules there is section called “Statement of Intention” under Bankruptcy Code Section 521 (a)(2) in which you have a choice to either state your intention to keep the property and therefore reaffirm the debt, or return the property to the lender who has the lien on the property.  You can surrender, reaffirm, or redeem the property.

If you state that you want to redeem the property, you are entitled to keep the property; however, you must negotiate a fair price to pay the lender; that is paying the fair market value.  This is a onetime deal, however, in that you cannot generally “buy” it on a monthly payment plan.  This may be a great deal if the value of the collateral property has gone down significantly and you can afford the cost…and the lender is reasonable.

Second, if you state that you want to reaffirm a debt, the lender will usually send a “reaffirmation agreement” which you need to sign and file with the Court.  Be careful and be sure you have legal advice on whether to sign or not.

Third, if you want surrender the collateral, you must surrender the property to the lender within 30 days, so they can take the property and lease or sell it.

What if You Don’t Reaffirm the Debt in Bankruptcy?

If you notify the Court that you intend to surrender the property, you must do so.  That is, if you have a vehicle, for example, where there is an outstanding loan, you can elect to not reaffirm, and simply return the vehicle to the lender.  Once your debts are discharged in the course of your bankruptcy, you will not owe anything to that lender.

What Happens to Debts that were not Reaffirmed in Bankruptcy?

Many times a debtor will properly complete the Statement of Intention and file it with the Court regarding reaffirmation; however, the debtor will not sign and file a Reaffirmation Agreement with the Court regarding particular debts, such as a mortgage.  In that instance, the creditors often accept the monthly payments and the debtor keeps the property or collateral.

However, after discharge in this instance, if the debtor subsequently defaults on the monthly payments, the creditor is entitled to the property, but the debtor is not obligated to pay any deficiency; that deficiency was effectively discharged by the process of bankruptcy.  It is also harder for a creditor to recover the property following a discharge and subsequent default.  Note that with a mortgage, however, the creditor simply undertakes mortgage foreclosure in this instance.

Hire an Experienced Bankruptcy Lawyer

Attorney Neil Burns has been representing folks in Chapter 7 personal bankruptcy since 1985.  He offers a free initial consultation, aggressive and caring representation and has the experience to get you a fresh start with expert bankruptcy planning.  Call today:  617-227-7423.