Can You Save Collateral Property in Chapter 7 Bankruptcy?

bankruptcy (the dictionary project, macro shots, shallow D.O.F.)In most cases of secured debt, such as a car payment, you have agreed that the asset which you are paying off will act as collateral for the loan. This means that normally, if you stop making payments, the car may be sold off in order to pay off the remainder of your debt.

Chapter 7 bankruptcy is a great solution for most people buried under mountains of debt, but there are many questions you’ll likely want answered prior to filing a petition. One of the more common questions we get asked around here is, “What happens to collateral property in Chapter 7 bankruptcy?”

Secured Debt in Chapter 7 Bankruptcy

Similar to unsecured debt, such as credit card debt, secured debt can often be discharged in Chapter 7 bankruptcy. What is actually being discharged is your personal liability to pay the debt. This means that once you’ve received your bankruptcy discharge, the creditor will be unable to file a lawsuit against you for repayment of the debt.

However, when your personal liability to repay a secured debt is discharged, the collateral property does not always go to you. In many cases, the asset will be liquidated by the creditor in order to repay the debt.

There are a few ways to prevent that from happening, including:

  • Reaffirmation – When you file bankruptcy, you may have to option to reaffirm some of your debt, which means that you will forfeit your right to discharge of that particular debt and will continue to be held liable.
  • Keep Making Payments – You may be able to work out a deal with the creditor so that you can continue to make payments on the loan even after your bankruptcy discharge.
  • Redemption – There are some cases where you may be able to discharge the debt AND keep the property depending on how much equity in the asset you own and whether or not you are up-to-date on your payments.

Call or fill out an online form today to find out how a Manalapan, NJ bankruptcy lawyer at Garland & Mason, L.L.C. can help you achieve your goal of becoming debt free.


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