For most debtors considering Chapter 7 bankruptcy, a decision must be made about what to do with assets that are attached to a loan. Secured loans — those with collateral property that the lender can take if payments aren't made — can be handled in one of four main ways during liquidation bankruptcy. Here's what you need to know about these four.
The most common way to keep your car or real estate after bankruptcy is to reaffirm the loan. Because the Chapter 7 bankruptcy discharges your responsibility for the loan, ordinarily the lender will take back the collateral. You may be allowed to keep it if you reaffirm it by essentially agreeing to a new loan. You can generally negotiate the new terms as well.
You may be able to redeem the asset by paying the lender what it is worth. If you owe $7,000 on a car that has depreciated and is worth only $3,000, you would redeem the car for the value ($3,000) and receive the vehicle in return. This can be very beneficial for depreciated assets. Redemption, though, can only be achieved if the funds you need to pay the lump sum and redeem the item have been exempted from liquidation.
Certainly, the quickest and least expensive solution may be to return the leveraged item. By returning the collateral and seeing the debt associated with it wiped out in Chapter 7, you leave with no asset and no debt. You do get a fresh start after liquidation. However, if you have invested a lot into the asset, this can be difficult to let go of.
Finally, a less common option may be to simply retain the asset and continue to pay on the loan. This option is not always offered by lenders because their ability to seek redress from a borrower is hampered by the fact that the borrower's legal obligation was discharged in bankruptcy. But a lender who is motivated to find a way to continue with the loan may agree to simply move forward with payments without the guarantee of a signed reaffirmation.
Where to Learn More
Want to know more about any of these four options available for secured loans? Start by meeting with an experienced bankruptcy attorney who specializes in Chapter 7. Together, you can assess your choices, make a plan that best serves your interests, and execute that plan to help you recover from your bankruptcy and start your new life. Call today to make an appointment.