Chapter 7 and Secured Debt
At some point in a typical conversation with a prospective client, I will say something like this: “Filing a chapter 7 bankruptcy will not help you with your secured debt – when it comes to your car payment or house payment, you’re on your own.” This can sometimes leave the false impression, though, that a debtor’s relationship with their mortgage or finance company will remain unchanged by a chapter 7. 11 U.S.C §521(a)(2) requires that an individual debtor file a “statement of intention” that lets a secured creditor know what a debtor plans to do with their collateral. A debtor has four options: (1) reaffirm, (2) retain and pay, (3) surrender, (4) or redeem. There are advantages and disadvantages to each of these options, but in general, a debtor chooses one of the first three options based on the confidence they have in their ability and desire to continue making the required payments. Secondary considerations may include the desire to improve one’s credit score or normalize relations with a particular lender, the type of collateral involved, the amount of equity enjoyed in a given item of collateral, and even the particular creditor involved. Without diving into the particulars of these decisions today, a few brief comments may be helpful. In general, a debtor trades risk for comfort. By reaffirming a debt, a debtor essentially removes the protection the bankruptcy gave him vis-à-vis a particular creditor. When you reaffirm your car loan with Wachovia it is as if, to Wachovia, you never filed bankruptcy. Depending on the circumstances, this can either be good or bad. If you have a relatively low car payment, a steady job, and aren’t in the habit of missing a payment, normalizing your relationship with Wachovia makes sense. However, if your car is worth significantly less than what you owe on it (yes, all you Ford F-250s out there, I’m talking to you), your payments are high, and your income in undependable, you want every bit of protection that your bankruptcy can give you. Bankruptcy allows individuals to revisit past decisions and decide whether, given current life circumstances, those decisions are good ones or not. Just because chapter 7 does not allow you to tinker with the details of a contract like chapter 13 or chapter 11, doesn’t mean that you shouldn’t use the opportunity to back away from an impractical purchase.
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For more than 20 years, the Sasser Law Firm has been helping individuals and business owners sort through financial hardships to see the light at the end of the tunnel. Our North Carolina bankruptcy attorneys are all board-certified specialists, which means we have passed a complex exam, undergone a thorough peer review, and continue to earn legal education credits in this ever-evolving area of law.
