In a typical Chapter 7 bankruptcy the debtor (the person filing the bankruptcy) is allowed to either surrender, reaffirm, or redeem personal property that is secured by a lien.
In surrendering a financed item of personal property, the debtor lists on the petition that he/she wishes to surrender the item and works out with the trustee a time and place for the trustee to pick up the item up. In exchange for surrendering the item, the debtor will receive a discharge of his liability to pay the remaining balance on the loan.
The second option that is allowed to the debtor is to reaffirm the loan on the property. In order to reaffirm the loan, the debtor must show the trustee that reaffirming the loan would not create an undue hardship on the debtor. For example, if the debtor is trying to reaffirm a newly purchased 2012 7 Series BMW with $900 monthly payments, but the debtor only makes $1500 a month, the trustee might argue that reaffirming the loan would create an undue hardship. If the debtor has an attorney, the attorney must approve any reaffirmation agreements to make sure that reaffirming the loan is in the best interest of the client. However, if the attorney does not approve the reaffirmation agreement, the debtor can still file a pro se reaffirmation agreement and reaffirm the loan without the permission of the attorney.
The last option available to a debtor regarding secured personal property is a redemption. If personal property is necessary for the household, Section 722 of the Bankruptcy Code allows the debtor to redeem the property at the current market value of the property instead of reaffirming the loan on the property at the current value of the amount borrowed. For instance, if a debtor has a car loan for $9000 and the current value of the vehicle is $4000, the debtor may be allowed to redeem the vehicle by providing a lump sum payment of $4000. The difficulty with trying to redeem personal property is that a debtor rarely has the funds to provide a lump sum payment. To remedy this, a number of loan companies that specialize in allowing a debtor to borrow money to pay for the lump sum value have sprung up nationwide. Typically, the 722 redemption loan company will pay the lump sum amount and allow the debtor to pay back that borrowed amount to the 722 redemption loan company. Although the debtor will still owe for the amount borrowed from the redemption loan company, this provides a great way for the client to lessen financial the financial burdens of necessary personal property while still maintaining that piece of property
If you are considering chapter 7 bankruptcy as a possible option and have personal property secured by a loan, you may want to consult with an experienced bankruptcy attorney to consider which of these three options would be beneficial to you for each piece of secured personal property.
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