Law Offices of David P. Leibowitz LLC
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If you are buying something on credit, like a car or a house, this is called a secured debt. In bankruptcy, you need to make choices about your secured debt. There are three options and maybe a fourth one too. These are called:
Here’s a brief explanation of each one:
Reaffirmation: In this instance, you, the debtor, agree to continue to pay the debt to the secured creditor, like GMAC or Ford Motor Credit. In exchange, you keep your car and keep paying your monthly payments just as you did in the past. Sometimes, your bankruptcy lawyer can help you negotiate a better deal with the lender in order to persuade you to reaffirm the debt. Maybe the lender will agree to do this because it is better off with you paying than it is for the lender to sell the car at a loss at auction. If you don’t reaffirm a debt secured by a vehicle, you run the risk of having the car repossessed or taken away from you outside of bankruptcy. This will almost certainly happen in Illinois and is likely to happen in Wisconsin too. Laws do vary in other states.
If you decide to reaffirm, your lawyer needs to certify that you can afford to do so. That’s why we charge a little extra for each reaffirmation agreement – we need to be sure we can give this certification taking into account your economic situation after bankruptcy. Otherwise, you’d have to go to court to explain to the judge why you can still afford this secured debt.
Surrender: Here, you decide that you can’t afford to keep a property securing the debt. Maybe your car is too expensive, or not worth much compared to the loan. Maybe it would pay you to give up the car and try to get another less expensive vehicle rather than keep paying on it. In this case, you’d give up the car and be discharged from debt on the balance. Surrender is often the right choice when you are deeply underwater or “upside-down” on your the mortgages on your house.
Redemption: This is sometimes a good choice when you have a late model car which has substantially declined in value compared to the loan, especially when you have a high interest rate. If you have the money, maybe from an IRA or even better, from a new loan, you can pay off the loan on your car for the present value of the car. For example, if your car is worth $15,000 and the loan is $30,000, you can get a new loan for $15,000 and discharge the remaining $15,000 in your bankruptcy case. This could result in a much lower payment for the balance of your loan. Ask us about redemption. We know how to do this – there’s an additional fee but in many cases, it’s worth it.
“Pay and Retain” or “Ride-Through” You can’t do this any more for personal property. However, we have found that you don’t have to reaffirm a debt secured by your house in order to keep paying it as normal. This is a good option since you maintain your mortgage as normal, but no longer have personal liability in the event that you default in the future. Ask us about this too.
Statement of Intention: One of the papers you’ll sign in your bankruptcy case is a “Statement of Intention”. On this paper, you’ll tell your creditors whether you want to keep your property and keep paying on it, surrender the property and be discharged from the debt or redeem the property by paying the current balance. Look this paper over carefully and make sure it’s correct
Some retail stores claim a security interest or lien in items like jewelry or computers. If you have this situation, let us know. We have some ideas which can help you.
Act on your intentions – Remember, you have to act on your intentions promptly, so when we send you a reaffirmation agreement, read it, make sure you agree with the terms, sign it and return it right away. And call us if you have any questions about any aspect of a reaffirmation agreement.
When you file a bankruptcy case, you need to make some decisions about your secured loans. These are loans secured by your house, your car or other personal property.
When you file your bankruptcy case, you must make a Statement of Intention for each of your secured loans. The law offers three options. These are:
Reaffirmation means that you intend to continue paying the secured debt just as before. More importantly, it means that you agree continued personal liability for the debt. Normally, bankruptcy eliminates all personal liability on debts, including secured debt.
Redemption means that you will pay the secured debt by paying the creditor cash equal to the value of the property securing the debt. For example, if your car is worth $10,000, you could pay $10,000 to satisfy that debt in full even though you owe much more. Even if you don’t have the cash, you can redeem a late model car through a specialized lender. We can help you with this.
Surrender means that you don’t intend to pay the debt and are willing to give up the collateral. This might be a good idea for a car worth $10,000 when you owe $25,000 on it. It is also the typical choice when facing foreclosure on a house you can’t afford to keep.
Reaffirmation isn’t always a good idea. You could continue to pay a mortgage debt on a house without reaffirming. The lender has to accept payments as long as you aren’t in default. If you default later, you won’t have personal liability. Reaffirmation isn’t a good idea if you might not able to pay the loan in the future.
However if you don’t reaffirm, redeem or surrender in the case of a car loan, you’ll probably find that the car will be repossessed.
You’d be surprised to find that items like jewelry, computers and electronic equipment often are security for payment of a debt. When this happens, please tell us about it. We have to deal with these situations on a case by case basis with the lenders.
We charge you a little extra for reaffirmation agreements. That’s because we have to certify to the court that you are able to pay without it being a substantial hardship. We also try to negotiate better terms for you whenever possible. Lakelaw wants to give you good value in all aspects of your bankruptcy case.
This is a technical area of bankruptcy law. This blog is not the place to describe all of the details. But Lakelaw wants you to be informed and ask questions about how to proceed in your particular case.