In Chapter 7 Bankruptcy, you normally have secured, unsecured, and priority debts, as well as administrative fees (like your court filing fee). Unsecured debts are promises to pay which are not secured by personal property or real estate, such as medical bills and credit card purchases. Tax obligations are normally priority debts and are usually not discharged. Secured debts are where your promise to repay the debt is secured by personal property or real estate.
Reaffirming a Debt
Many times, clients who file Chapter 7 will want to keep their home, car, or other personal property that they have financed. If you decide to keep a secured debt, then you will need to continue to make all of your regular monthly payments under the original contract with the secured creditor.
The creditor has the option to send you a Reaffirmation Agreement. Make note – it is the creditor’s option to reaffirm the debt. If the creditor does not wish to reaffirm, they can reclaim the property. You typically must be current on the payments at the time of filing in order for the creditor to send you a Reaffirmation Agreement. You must sign the agreement promptly and return it, so that the creditor can file it with the court. If the reaffirmation agreement is not signed and returned so that the creditor can file it prior to the closing of your case, then it is not valid and the creditor will be able to reclaim their collateral.
One benefit of having a reaffirmation agreement in place is that the creditor will probably continue to report your payments to the credit bureau. This can help rebuild your credit score after bankruptcy. However, remember – a reaffirmation agreement is a new contract between you and the creditor, which means that the debt will no longer be discharged as part of your Chapter 7 bankruptcy. You should continue to make on-time payments to that creditor until the loan is paid in full.
Rescinding (Canceling) Reaffirmation Agreements
If you reaffirm property, you have sixty (60) days to rescind (cancel). A debtor has sixty (60) days from the entry of the reaffirmation agreement or until the date of discharge to rescind a reaffirmation agreement, whichever is later.
A debtor can only rescind a reaffirmation agreement in writing. Should you wish to rescind a reaffirmation agreement, you should immediately do the following: 1) provide written notice to the creditor of cancellation and 2) call your attorney’s office to speak with him/her so they can file a notice of rescission of reaffirmation agreement with the United States Bankruptcy Court Clerk to cancel your reaffirmation agreement.
Redeeming Collateral in Chapter 7
In some circumstances, you may be able to redeem your collateral such as a car or furniture that you are financing. A redemption is where you pay the value of the property rather than the entire payoff of the note. However, instead of paying in installments, with a redemption you must pay in one lump sum. The creditor has the right to contest the redemption and in some cases will send an appraiser to value the property and testify for the creditor.
If you have a lump sum amount available to you, talk to your attorney about your options to redeem your collateral.
In Chapter 7, you have the option to surrender collateral that you no longer wish to keep or can no longer afford. If you have a car payment that is too high, for example, you can surrender that car back to the creditor, discharge the loan in your bankruptcy, and find a more affordable car.
What happens after I surrender my home and move out?
In some cases, you may wish to surrender a piece of real estate – perhaps a rental property that you had, or a home that is no longer affordable or reasonable for you to keep. You can surrender real estate in a Chapter 7. (If you wish to keep your home, there are exemptions you can use. Read our blog about Tennessee State Exemptions for real estate.)
The law does not force a mortgage creditor to foreclose on surrendered real estate. In fact, it can take a mortgage creditor many months to foreclose in some instances.
If there is a Homeowner’s Association to which you owe dues, then you must continue to pay these dues until the mortgage creditor forecloses on the property and the property is no longer in your name. The bankruptcy will be able to wipe away any Homeowner’s dues that you owed prior to filing the bankruptcy; however, you will be responsible for any dues that are incurred post-filing up until the date that the deed is transferred out of your name.
You also may need to keep hazard insurance on the property, as you may be liable for any accidents that occur on the property, even if you are not living there. You may be responsible for maintenance on the property to comply with codes in your county until the mortgage company forecloses on the property. Talk with your attorney about steps you can take to protect yourself if you are surrendering real property in your Chapter 7 bankruptcy.
If you have more questions about this process, be sure to communicate with your bankruptcy attorney, your mortgage company, your Homeowner’s Association, and your property insurance carrier.