What about collateral securing the payment of a debt?

 
A secured debt is simply a debt obligation “secured” by a creditor’s lien on pledged collateral to guarantee repayment. The most common types of secured debts include home mortgages and automobile liens. Although Bankruptcy law prohibits a secured creditor from suing you personally on the balance of a defaulted loan that has been discharged, it does not preclude such a creditor from repossessing its collateral. In the event you wish to keep the collateral, you must reaffirm or redeem the collateral.
 
In Chapter 7 cases, you have the following four choices with respect to property pledged to secured creditors:
 
  1. The Real Estate “Be-Current-and-Stay-Current” Right to Retention – If the collateral you wish to retain is real estate and your payments are current on the date you file the Chapter 7 petition, and your equity in the collateral is covered under the exemptions, you may keep the property so long as you continue to make the monthly payments and comply with the terms of your contract. We call this the “be-current-and-stay-current” right to retention.
  2. Reaffirmation Agreements – Prior to Congress’ radical changes to the Bankruptcy Code, you also had the “be-current-and-stay-current” right to retain personal property, such as automobiles. Now, to be absolutely sure you can keep the personal property that secures a debt secured by personal property, you must also sign a reaffirmation agreement. Though the new law is unclear, most experts are of the opinion that a creditor can repossess the collateral unless you enter into an agreement reaffirming the debt within sixty-five (65) to eighty-five (85) days after you file the bankruptcy. We believe it to be unlikely that a creditor will in fact repossess collateral when you are current with your payments, but there are no guarantees. Please note that a reaffirmation reinstates your personal liability on the debt obligation regardless of your bankruptcy discharge. Your decision to reaffirm a debt may well be the most important one you make in the bankruptcy case. Please be sure to consult with us on this point so that we may better assist you.
  3. Redemption – You may redeem the property by paying the creditor the value of the collateral. The value of a vehicle is the amount for which it would be sold at retail by a used car dealer in its current condition. For example, if you owe Huntington Bank $15,000 secured by a vehicle which has a retail value of 10,000, you can pay Huntington only $10,000 and still keep the vehicle. There are redemption loan financers who lend money to Chapter 7 debtors to redeem vehicle loans. Even though their rates are high, these financing arrangements may save you money in the long run.
  4. Surrender – Your final option is to give the property back to the creditor (“surrender” the property) and have the debt discharged.
  5. Exceptions: There are two circumstances in which you can retain property encumbered by a secured debt in a Chapter 7 case even if you do not wish to maintain your payments:
    • Impairment of Exempt Interest – A creditor’s judgment or lien on property that impairs your exempt interest in the property may be retained by the debtor without exception.
    • Non-possessory, Non-purchase-money Security Interests – A creditor may not obtain collateral secured by a non-possessory, non-purchase-money security interest in exempt personal household items (televisions, furniture, clothes, jewelry, tools of the trade, or professionally prescribed health aids). “Non-possessory” simply means the creditor is not physically holding the property. “Non-purchase-money” means that the creditor neither sold you the collateral, nor lent you the money with which to buy it.