Debt Settlement: Car, Home, and Other Secured Loans
Debt Settlement in Bankruptcy
There are many myths surrounding filing for bankruptcy, but two of the most enduring ones are actually two sides of the same coin.
On one hand, people often believe that when filing for bankruptcy, they will lose everything. This, of course, is not true.
It is also a common belief that filing for bankruptcy means that all debts disappear, and that one can keep cars, homes, and other properties that serve as collateral without having to repay the loans. This is also not true.
When considering filing for bankruptcy, it is important to understand what property you can retain and what you need to do to keep it.
One Loan, Two Agreements
A secured loan actually involves two different agreements: the promissory note and the security agreement.
The promissory note, the first, contains the terms of the loan. It includes financial information regarding the amount you will be financed, interest rates, payment amounts, loan duration, payment due dates, how payments will be made, late fees terms and amounts, the total amount to be paid over the life of the loan, and more information related to how the lender expects the repayment of the money you borrowed.
The security agreement is a separate contract, although it may be included in the same document that contains the promissory note. The security agreement grants the lender certain rights in the property you financed. The item becomes collateral for the loan. The lender agrees to pay the purchase price of the item. You agree that if you do not make payments according to the terms of the promissory note, the lender has the right to take back the property (repossess it or initiate eviction procedures), sell it, and apply the proceeds of the sale towards the amount you still owe the lender.
Secured Loans and Bankruptcy
In a bankruptcy case, the repayment obligation under the promissory note – that is, the obligation to repay the loan – is subject to discharge. Therefore, if you do nothing to change the outcome, the promise you made to repay the money will be discharged when you receive general discharge.
Sounds great, right? This is what you are looking for in Chapter 7 – the discharge from the obligation of repaying those burdensome accounts.
But there is something important. The security agreement is not subject to discharge. The lender still has an interest in the property and the right to recover it or initiate eviction proceedings on it if you do not pay. Some people may find themselves with a discharged loan and no repayment obligation, but still retain the collateral.
However, it is likely that you will not keep that collateral for long. This is because the lender typically wants to have the property to recover at least part of the amount owed to them.
The lender also does not have to wait until the end of the Chapter 7 case to start this process. When filing Chapter 7, one of the documents included in the legal papers is called the Statement of Intention. In the Statement of Intention, you list all of your secured debts and indicate whether you intend to keep the property or surrender it to the lender. If you do not wish to keep the property, you are required to provide it to the secured creditor no later than 45 days after the creditors’ meeting. If you do not surrender the property by then, the secured creditor can initiate eviction or recovery actions without needing to obtain permission from the bankruptcy court.
Reaffirmation vs. Redemption
In Chapter 7, you have two other options mentioned in the bankruptcy law: redemption of the property and reaffirmation of the note.
Redemption is particularly useful if you owe more than the value of the property. It is used almost exclusively for personal property such as cars or household appliances. It allows you to pay the value of the property to the lender, typically in a lump sum. This will satisfy both the promissory note and the security agreement. To achieve this, some borrowers refinance the property through other lenders, such as companies that specialize in helping debtors redeem property.
Since
Because many borrowers either cannot raise the funds to reclaim their property or do not want to pay the higher interest rates that the recovery funding company will impose, many borrowers will choose to reaffirm the debt they already have. Reaffirmation is a process that takes the loan out of bankruptcy. Liquidation will not apply to the reaffirmed loan, and the debtor remains liable to the creditor on both the promissory note and the security agreement until the loan is paid off.
Debtors can reaffirm loans only if they can actually afford the payments. Most often, bankruptcy schedules, including a list of income and expenses, will show that there is room in the budget for the payment. If not, it may be necessary to hold a hearing before a bankruptcy judge before a reaffirmation agreement is approved.
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Sources:
United States Courts. “Discharge in Bankruptcy – Bankruptcy Basics.”
United States Code. “11 USC §521.”
United States Courts. “Instructions: Bankruptcy Forms for Individuals,” Pages 38-39.
Source: https://www.thebalancemoney.com/discharging-debts-car-home-and-other-secured-loans-316147
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