If a debt is secured by a lien (i.e. on a car title or a mortgage on real property), the lien usually survives the bankruptcy. Hence, the personal obligation of the debtor may be discharged, but the creditor’s lien survives. If suitable arrangements are not made, the creditor may be entitled to repossess his collateral post-bankruptcy.
A debtor has several options under the Bankruptcy Code on dealing with secured creditors:
- Reaffirmation: this is an agreement between debtor and creditor that allows the reaffirmed debt to survive as if bankruptcy never took place. If you later default, the creditor’s rights after bankruptcy are the same as before bankruptcy, i.e., you can be sued, garnished, etc. to collect the debt. Hence, you should think carefully about reaffirming a debt and discuss your options with your attorney to fully understand the consequences. Most debts are reaffirmed according to the original terms of the agreement, although it is possible to negotiate modifications in some circumstances.
- Redemption: this means you pay the secured creditor only the value of the asset, rather than the balance owed, but this must be done in a lump sum payment. Redemption is not available for all types of property but is often used with respect to cars or other personal property. You should consult an attorney about whether redemption is a good idea in your situation. The problem with redemption is obvious: where does a debtor get a lump sum of cash to redeem the asset? While some people can borrow from family or from exempt assets, not everyone has that option. There is now at least one company that will loan money to redeem cars providing you qualify, and most people do.
- Surrender: if you surrender the collateral, the creditor sells the asset and applies it to the debt you owe. The balance remaining after the asset is sold, called the deficiency, is now an unsecured debt and is discharged with your other debts.
- Do nothing by simply continuing payments: BUT BE CAREFUL! This option is not written anywhere in the Code. Courts are split on whether a creditor can repossess collateral post-bankruptcy if the payments are current, but no reaffirmation agreement was signed. In Ohio, it is generally held that a creditor CAN repossess a car if no reaffirmation was signed even if the payments are current. But in reality, most creditors realize this is foolish to do. For example, consider a car with a loan balance of $10,000 and a value of only $6,000. Because of the negative equity, it is usually unwise to reaffirm such a debt because if you default, you will be left with a large balance. Yet, suppose you want to keep the car and cannot afford redemption. If you maintain your payments and insurance, the creditor would be foolish to repossess, because at auction they would be lucky to get $4,000 – $5,000 toward the loan. Whereas if they don’t repossess, you are very likely to continue all your payments. But you can only use this option if you could live with the car being repossessed after discharge.
If the debt is less than the value or there is no secured debt you need to look to the value of the property and the allowable exemptions in the state you are filing.