Handling Secured Loans in Chapter 7 Bankruptcies.
The dilemma: Reaffirm, Redeem, Surrender or something else?
The most difficult issue in a Chapter 7 bankruptcy is how to deal with property the acts as collateral on a loan, such as a car loan, or a home.
Prior to the enactment of the BAPCIPA reform in 2006, debtors who filed a bankruptcy had 4 options when it came to a secured loan. They could:
Reaffirm the debt. A reaffirmation of a debt means that the debtor is still liable on the amount of debt that has
been reaffirmed. If the debtor does not pay the debt, the creditor may proceed against the debtor or the property securing the loan just as if the debtor had not filed the bankruptcy (assuming the automatic stay is still not in place). This can result in the debtor being in deep financial trouble despite the bankruptcy. On the other hand since the debtor is obligated on the debt, the creditor will usually report prompt payments, and this can help reestablish good credit. Reaffirmations are a reasonable way a debtor can retain property that they wish to keep if:
the debtor is not backwards on the loan;
the debtor can reasonably afford the payments; and
the debtor desires to re-establish credit; or
the debtor has no other reasonable option to obtain housing or transportation and the debtor can afford the payments.