Filing for Chapter 7 bankruptcy has the advantage of discharging debt you owe. However, if you used certain property as collateral for a loan, you still will have to provide some sort of compensation to the creditor to avoid losing the property. What do you do when you qualify for a Chapter 7 bankruptcy but want to keep a secured debt? The good news is that you may be able to do both. By reaffirming the debt, you can still file for Chapter 7 and retain the property.
What is a secured debt?
A secured debt is one that involves property you are paying for, such as a car or computer. The property serves as collateral the creditor can repossess if you do not pay off the debt. Secured debts include your personal liability and the creditor’s lien. You can get the personal liability discharged in your bankruptcy case, but it cannot eliminate the creditor’s legal claim on collateral property.
What are your options for handling secured debts?
You have three options for responding to a creditor’s lien on your property:
1. Surrender the property (if the creditor wants it) to get rid of the debt.
2. Redeem the property by paying the replacement value.
3. Reaffirm the debt instead of having it discharged, and continue to make payments under a new contract.
Debt reaffirmation usually entails drawing up a new contract and should include the creditor offering you an incentive for signing it, such as a lower interest rate. Both you and the creditor have to agree on the terms, and then the court must approve it before it goes into effect. The judge will take into consideration your ability to pay the debt and the impact it will have on your financial situation.
Is debt reaffirmation a good idea?
Debt reaffirmation is appealing but not right for all situations. It is best if you must keep the property and are able to continue making payments on it, or else the creditor will take it away anyway. If you will not be able to stay on top of payments, see if the property qualifies for an exemption instead of reaffirming the debt. If the property is not necessary for making a living or assisting with a disability, it may be better to surrender it.
Even if you meet the requirements, you should review the advantages and disadvantages of debt reaffirmation. Also, discuss with a Florida bankruptcy attorney if that route is smart for you before going through with it.