Secured Debt and Bankruptcy

Prospective clients often have a number of types of debt and issues leading them to consider filing for bankruptcy. One of the most commonly asked questions is whether a particular item or debt has to be included in the bankruptcy. The answer to this question is unequivocally “yes”. Any debt that is owed at the time of filing must be listed on the bankruptcy petition and schedules. A debtor cannot choose to exclude certain items or debts and repay those.

However, the Bankruptcy Code does allow debtors some options with respect to certain types of secured debts, including homes loans and vehicles. In a Chapter 7 Bankruptcy the debtor can choose to keep the loan by either reaffirming the loan or redeeming the collateral. When a debtor files for bankruptcy any pre-petition contract is null and void. A reaffirmation agreement, as a practical matter, is an agreement between the debtor and the creditor to assume the original contract under the original terms. This agreement would be signed post-petition. If a debtor chooses to enter into a reaffirmation agreement the debt is not discharged. Should the debtor fall behind on payments on the home or vehicle the creditor could foreclose or repossess the property. In the event that the property is foreclosed or repossessed the debtor may owe a deficiency balance to the creditor. Due to waiting periods between filing for bankruptcy the debtor may be without a remedy against collections efforts for some period of time.

Redeeming collateral is a bit different than redemption, but is certainly a viable option. Redemption is where the debtor pays of the loan in full post-petition. This may sound impossible; however, there are a number of lenders that specialize in redemption loans. In some cases the redemption loan has a better interest rate or terms, making it more favorable than the original loan. That being said, reaffirmation agreements are far more common than redemptions.

In a Chapter 7 a debtor also has the option to surrender collateral. Basically, a debtor can list property as being surrendered and walk away free and clear. Any deficiency from the resale of the collateral would be discharged in the bankruptcy. This option may allow the debtor a fresh start after filing for bankruptcy as there will not be any further payments or amounts owed. Should a debtor surrender property his/her attorney may be able to make a recommendation of where to consider obtaining an alternate vehicle, home loan, or rental agreement. While it is true that bankruptcy can, and likely will be, considered as a part of your eligibility there are a number of lenders willing to work with people that have filed for bankruptcy.

If you have questions about this, or would like a free consultation, contact a St.Louis Bankruptcy Attorney Today.