Bankruptcy

Chapter 7 Bankruptcy: How to Keep or Let Go of Secured Property

By Carron Nicks, Attorney
When you file for Chapter 7 bankruptcy, you must tell the court and your lender whether you want to keep your secured property, such as a house or car, or let it go back to the bank. Here's how you do it.

When you file for Chapter 7 bankruptcy, you must tell the court whether you intend to keep your “secured” property—property that the lender can take back if you fail to pay for it—on the Statement of Intention for Individuals Filing Under Chapter 7 form. Secured property includes things such as your house, car, jewelry, or large appliances. You can keep the property as long as you continue paying for it. If, however, you’d rather have your balance “discharged,” or wiped out, you must return the property to the lender.

To learn more about secured claims, see Secured Claims and Liens in Bankruptcy.

The Statement of Intention Form

When you file for Chapter 7 bankruptcy, you tell the court about your income and expenses, assets and debts, and prior transactions on official bankruptcy forms. The Statement of Intention for Individuals Filing Under Chapter 7 form informs the court about your plans for your secured property. You’ll select from one of four choices:

  • surrender
  • reaffirm
  • redeem, or
  • other.

Here’s what each of these options mean.


Surrender

You can always choose to turn the collateral over to your lender. The loan will be discharged, and you won’t have to make any more payments on it.

Reaffirm

Filing for bankruptcy works by canceling all of your contracts with your creditors. If you want to remain obligated to a lender, you can enter into a new contract by signing a “reaffirmation agreement.” You and your lender can agree to continue the original contract terms, or you can try to negotiate new terms. In either case, you, or your attorney, must sign a certification that you can afford the payments. If you have filed your Chapter 7 case without a lawyer, or if your attorney decides not to certify the reaffirmation agreement, you will have to appear before the bankruptcy judge who will decide whether to approve the reaffirmation. Reaffirmation works best if your payments are up-to-date when you file your Chapter 7 case. If your payments are behind, your lender might require you to bring the loan current before you enter into a reaffirmation agreement (which is difficult for many people filing for bankruptcy).

Redeem

If the property is worth less than what you owe, you might want to consider redeeming it. When you redeem collateral, you pay the lender only what the property is worth. For instance, suppose that you owe ABC Motors $11,000 on your car, but the car is only worth $7,000. If you reaffirm the loan as it is, you will end up paying a lot more than just the value of the car. If you’re able to borrow money from relatives to pay $7,000 in a lump sum, you can file a motion asking the court to allow you to redeem the property for its actual value.

Other

If you want to suggest another legally permissible alternative arrangement, you’ll list it under “Other.” Some courts allow what’s called a “pass-through” strategy. If you continue making payments even though the debt is discharged in your Chapter 7 case, some lenders are happy to take your money rather than repossess and sell the collateral.

A pass-through is not an official choice on the Statement of Intention, and many lenders don’t like this option because the debt is discharged. If you stop making payments, the lender can repossess your car but can’t take other actions to collect the debt like making phone calls, sending demand letters or filing a lawsuit. Although a pass-through might look like an attractive option because the debt is discharged, the payments you make after the bankruptcy case is over won’t show up on your credit report or help improve your credit score. Also, your lender could repossess the car even if your payments are up-to-date.

Consult With an Attorney

You must do more to keep your property than check a box on the statement of intention form. For example, you’ll likely need to be current on your payments, and be able to protect all of the property’s equity under your state’s exemption statute. If you don’t understand how filing for Chapter 7 bankruptcy will affect your property ownership, you should consult with a local bankruptcy attorney.

For more information about keeping a house or car, see Secured Claims in Chapter 7 Bankruptcy: Can I Keep My House or Car?

Questions for Your Attorney

  • How long will I have to wait before I can finance another car?
  • What will happen if I sign a reaffirmation agreement but can’t make the monthly payments?
  • If I state that I want to sign a reaffirmation agreement, can I change my mind later?
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