When one files a Chapter 7 bankruptcy, they have more than one option with debts secured by a piece of property they want to keep. All secured means is that the creditor has the right to recover the property if the payments are not made. This applies to homes, cars and sometimes jewelry or any property on a Nebraska Furniture Mart credit card. One option when filing a 7 is to simply surrender the collateral, say give up a car, while discharging the debt.
However, if the Debtor wants to keep the collateral or property that secures the loan, then they will need to satisfy the lien somehow. One way to do that is to simply continue to keep the payments on the secured debt current during and after the bankruptcy. You get to keep the property, and when the debt is paid off you receive a lien release that would then allow you to sell the property if you so choose. The debt must be paid off in full under the same terms as the contract signed before the bankruptcy.
Another way to keep secured collateral is to redeem the property. While this does not work for real estate like homes, it does apply to any other property which is called personal property. Instead of making payments on the original loan, the Debtor can provide to pay the creditor what the property is worth instead of what is owed. This amount generally needs to be paid within a few months after filing, but some creditors will agree to a slightly longer payment plan.
For example, say you own a car that is worth $10,000 but you owe $20,000. You normally would need to pay off the $20,000 plus interest over time after the bankruptcy is filed to receive a lien release. That does not make economic sense to pay twice what something is worth. However, you could also get a lien release by paying the creditor the value of the car, or $10,000 in this example. Now, unless you have some family member willing to pay the money, then you would need to seek financing while still in your Chapter 7. There are several lenders willing to make these types of loans. Unfortunately, they do tend to charge high rates of interest as high as 24%. However, sometimes it makes more sense to pay 24% interest on $10,000 than 6% interest on $20,000. Indeed, when you can reduce your monthly payment on a redemption loan it can be a powerful way to keep a car you would otherwise need to be surrendering. One lender who makes these loans is 722 Redemption, 1-888-721-2800.
Nebraska Furniture Mart will sometimes agree to be paid over three months on a redemption and can be reasonable on the values of the used property that serves as collateral. If you are wanting to keep some personal property that is worth far less than the secured debt, then you may want to ask your attorney if redemption could allow you to keep the property for less money than paying the debt in full over time.
By Bill Turner,
W M Law Attorney