Secured debt vs Unsecured debt
The answer depends on what Chapter bankruptcy you file under: either chapter 7 or chapter 13. The other question is the debt is secured (like a home mortgage or auto loan) or unsecured, like most credit card debt. Secured creditors usually get paid in full no matter whether yours is a Chapter 7 or 13 if you decide to keep the collateral (i.e. the house, the car). In a Chapter 7, where most unsecured creditors, that is the credit cards, get nothing at all. A debtor may “reaffirm” some debt and not others. However, in a Chapter 13, you may not discriminate between one unsecured creditor and another.
Some debts are “secured” debts, and some are “unsecured” debts. Secured debt is debt that involves having something on the table that your creditor can take if you do not pay what you owe. For example, if you fall behind on your mortgage payments, the bank can foreclose (take) your home and sell it to get the money you owe. The house is collateral. Another example of secured debt would be a car loan. If you fall behind on your
car payments, your creditor will try to repossess your car. In both of these examples, the creditor has an interest (rights) in the property used as collateral.
Bankruptcy is often an effective way to deal with secured debts. When you file for bankruptcy, you must tell the court what you intend to do with those assets that are collateral for secured debts. Even if your debt is discharged, the creditor still has an interest (rights) in the secured property. In Chapter 7 bankruptcy, you have three options for dealing with secured debt:
1) return the property and owe nothing;
2) keep your property and “reaffirm” your debt;
3) “redeem” your property and pay the creditor the fair
market value of that property (as opposed to what you had agreed to pay for it).
The second option of reaffirming the debt means that the debt is not discharged by the bankruptcy. If you fail to pay what you owe, your creditor can still sue you for not keeping the reaffirmation agreement. Reaffirmation is the most common choice. That’s because most people are afraid that if they lose the car, for example, then they won’t be able to get financing on another one. They really need a car, and they can’t come up with the
cash to buy out the creditor with the lump sum that “redeeming” requires.
There may be good news for some about reaffirmations: even if the law requires that you reaffirm the debt, the reaffirmation has to be approved by the court in many cases. If your budget shows your household hemorrhaging red ink, the bankruptcy court clerk may well set the reaffirmation agreement for a reaffirmation hearing in the bankruptcy court. At that hearing, even though you previously had agreed to reaffirm the debt, and you
signed the required Reaffirmation Agreement, the judge can still simply deny the creditor’s request to enter the reaffirmation agreement. If the judge finds that the reaffirmation will pose an “undue hardship” on you, the reaffirmation is dead. So, then you get to keep the car so long as you continue to regularly make the payments. If you don’t pay, the lender can still repossess, but they can’t sue you for the difference if they don’t get everything
they’re owed when they auction the vehicle.
If you’re eligible for a Chapter 13 bankruptcy, your repayment plan will determine what property you are able to keep. If you don’t adhere to the repayment plan, then your bankruptcy may be dismissed. If the reason you’re not adhering to the payment plan is that there has been a big change in your finances, you may convert your Chapter 13 to a Chapter 7.
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