Dealing with secured debts in bankruptcy

One of the really great features of bankruptcy is that you can use it to get rid of the financial anchors that have been weighing you down. These often include houses that are worth significantly less than you owe on them (very, very common in the current housing market) or cars (also common as cars often depreciate ahead of the payoff schedule). These types of debts are called "Secured," because the property that is the subject of the loan is used as collateral. When you file bankruptcy, you will have some choices with regard to to secured debts. You'll generally have three options:

Surrender the property

This, quite literally, involves handing the keys over to the bank. You are then freed from any liability relating to that debt.

Reaffirm the debt

After you file bankruptcy, the party that holds your mortgage or car loan may reach out to you through your attorney. They may propose that you sign a Reaffirmation Agreement. This means that you would agree to repay a debt that would otherwise be discharged in the bankruptcy. As a general rule, we discourage our clients from signing these agreements, because they aren't always in the client's best interest. There are some instances where a reaffirmation makes sense. Sometimes lenders will agree to reduce the interest, the principal or the term of the loan. Of course every situation is different.

Retain and pay

Retain and pay is the most common solution. Essentially, this occurs when you do not sign a reaffirmation agreement, but keep using the collateral and making your scheduled payment to the lender. The lender has the right to foreclose/repossess, but they don't have any incentive to do so, because they are getting paid. The advantage to retain and pay is you can use the collateral as long as it suits you (even through payoff), and still decide to surrender it with no consequence if it ceases to meet your needs (if your car blows a transmission you may not want to keep paying for it)..