Handling Secured Loans in Chapter 7 Bankruptcies.
The dilemma: Reaffirm, Redeem, Surrender or something else? The most difficult issue in a Chapter 7 bankruptcy is how to deal with property the acts as collateral on a loan, such as a car loan, or a home. Prior to the enactment of the BAPCIPA reform in 2006, debtors who filed a bankruptcy had 4 options when it came to a secured loan. They could:
The above three options are still available after the laws changed in 2006. Prior to 2006 the debtor had the legal right to:
The new bankruptcy laws have been interpreted to allow a creditor to proceed against the bankrupt’s property, even if they are current on the loan. Practically, however, most creditors would rather take the payments, than the property. So as a practical matter, many debtors still can elect to retain the property and stay current on the loan. The concern that we bankruptcy attorneys have, is that a creditor might change its mind or its policy after the debtor had made significant payments on a debt, and now there is equity in the property where before it was underwater. A debtor might be able to prevail in a state court, by contending that the creditor waived the default caused by the bankruptcy by continuing to accept the payments, however, that might be like locking the door after the burglary, especially in a vehicle repossession.
None-the-less, many of my clients still opt for the retain and pay option, especially where they are seriously upside down on a vehicle or on a home mortgage, simply because obtaining another vehicle or buying another house is just not an option. So far, knock on wood, we have not seen any creditors taking the stance that they can keep accepting the payments and then foreclose or repossess the property later. We have seen some credit unions and Ford Motor Acceptance take aggressive stances that "retain and pay" is not an option and that they will repossess if the debt is not reaffirmed or redeemed.
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