When filing for bankruptcy, there are several options to consider regarding secured property. Secured property is any property that you have placed as collateral for a loan; typical examples of this type of property would be cars and houses, but this could also include things like financing furniture or household goods, like electronics. With this type of property, a debtor has a few different options through a bankruptcy; he or she can choose to surrender the property, reaffirm the debt, or to redeem the collateral. Each of these options have advantages and disadvantages depending on the debtor’s specific situation. Here, we will focus on the basics of each option.
One of the options for secured debt through a bankruptcy is to surrender the collateral. In order to keep a secured debt, such as a house or car, you have to pay the loan balance in some way. However, if you are unable to pay for the property anymore, and you want to start over fresh, you can surrender the property through the bankruptcy. When you surrender the property, you are no longer liable for the loan balance on the property. While you will no longer have the property to use, it is a good option for those who are in over their heads with payments, or those who are behind on payments. Surrendering the property gives you a chance to walk away from the loan free and clear.
Another option for secured debts is to reaffirm the debt. This is a popular option for individuals who are current on their secured loan payments and want to keep their property post-filing. Reaffirming the debt basically means that you are agreeing to abide by the original terms of your loan, and continue making payments on the loan balance as if the bankruptcy never happened. This option not only allows you to keep your property, but it also can help you build your credit post-filing. However, while this can be a good option for those who wish to keep property, it is imperative to be sure you are able to continue making payments on the loan on time and through the entire life of the loan before signing a reaffirmation agreement. If you default on a reaffirmed debt, you will be liable for the loan balance.
A final option debtors have concerning secured debts is redeeming the property. Redemption means that a debtor will make a one time, lump sum payment to the creditor in the amount of the secured portion of the debt. The secured portion of the debt is determined by evaluating the fair market value of the property, since that is the only portion that is secured. When a loan is worth more than the fair market value of the collateral, a creditor is under-secured and can only recover for the secured amount. This means if you owe the creditor $15,000 on a car that is only worth $10,000, if you stopped paying the loan and they repossessed your car, they wouldn’t be able to sell the collateral for the full loan balance. However, when redeeming the property, you can discharge the unsecure portion of the loan through the bankruptcy. You can determine what the unsecured portion is by subtracting the fair market value from the loan value. So, if your loan balance is $15,000, you would subtract the fair market value of $10,000, and the balance left over from that is the amount that would be able to be discharged through the bankruptcy. Then, to redeem the property, you would have to make a payment of $10,000 to the creditor to redeem the property.
As mentioned previously, each of the options has certain advantages and disadvantages, and the best option for a specific debtor will depend on his or her particular situation. The advantage of surrendering property is that you can walk away from a potentially large loan balance (such as a mortgage) free and clear; however the disadvantage is that you have to give the property up to the creditor. Reaffirming property will allow you to keep secured property, continue making payments on it, and rebuild your credit; however, if you default on the loan at any point before the loan is paid in full, you will be liable for paying the deficiency. The advantage to redeeming property is that a debtor can keep then keep the property, will own the property free and clear of encumbrances, and will not have any ongoing payments on the collateral. Of course, this option does require a debtor to make a lump sum payment, which may not be possible for all debtors.
If you still have questions on how you should treat your secured debt, contact your St. Louis Bankruptcy Attorney today to discuss the available options.