A secured debt, such as a car loan, is different from a credit card. The lender holds a lien on the collateral and can generally enforce it even after the debtor's personal liability is discharged. When a Chapter 7 debtor wants to keep the collateral, or to give it up, the choices have names that clients rarely understand. This article explains them for assistants and paralegals who prepare the paperwork. The attorney advises the client on which choice is right.
The statement of intention
For secured consumer debts, the debtor files a statement of intention that says what they plan to do with each item of collateral. The Bankruptcy Code sets short deadlines, measured from the filing date and the meeting of creditors, for filing it and carrying out the plan, so it is one of the first things to prepare and track. Local practice and court rules vary, and the attorney should confirm the current requirements.
The main options
Surrender
The debtor gives the collateral back to the lender. The lender then sells it, and in a Chapter 7 case the debtor's personal liability for any shortfall is generally discharged. This is common when the debtor owes more than the property is worth or no longer needs it.
Reaffirmation
The debtor signs a new agreement with the lender to remain personally liable for the debt, in exchange for keeping the collateral. The agreement must meet specific legal requirements, is filed with the court, and in many cases is subject to review. The debtor has a limited time to cancel it, and if the debtor is not represented by an attorney in negotiating it, or if the agreement appears to cause undue hardship, the court may need to approve it.
The key point for clients is that reaffirmation means the debt survives bankruptcy. If payments stop later, the lender can seek the balance from the debtor personally, and not only the collateral. That is why the attorney should explain this decision carefully.
Redemption
For certain personal property that secures a consumer debt, a debtor may pay the lender the value of the collateral in a lump sum, and then own the property free of the lien, even if the debt was larger than the value. Because it requires a lump sum, it is not always practical, though some lenders and third-party financing programs exist for this purpose. Redemption has its own legal requirements, and the attorney should handle it.
Keeping the collateral and continuing payments
In some jurisdictions and with some lenders, a debtor who is current on a loan may be allowed to keep the collateral and continue making payments without signing a reaffirmation agreement. This is sometimes called "retain and pay." Whether it is available depends on the circuit, local practice and the lender's policy, and carries risks, so it is an attorney decision.
Other options for secured debts
Where the debtor wants to keep a home or car but has fallen behind, Chapter 13 can allow the arrears to be repaid over the life of a plan. That is covered in Chapter 13 plan basics, and the choice between chapters is explained in the primer.
What the assistant does
- Collect the facts. Lender, account number, balance, monthly payment, payment history, the vehicle's mileage and condition, and a realistic value from a named source.
- Note whether the debtor is current. That affects the options available.
- Prepare the statement of intention as the attorney directs, not by default, and track the deadlines.
- Prepare reaffirmation paperwork when instructed, and make sure the attorney reviews it before the client signs.
- Check the schedules. The values and loan balances on Schedule A/B, Schedule C and the secured-creditor schedule should agree. See assets and exemptions.
What the assistant does not do
Advising a client whether to reaffirm, redeem or surrender is legal advice, and so is negotiating terms on the client's behalf. If a client asks, record the question and bring it to the attorney. For more on that boundary, see what non-attorney assistants may and may not do.
Keep learning
Secured debts are one of the areas where an assistant's care shows. If you want to demonstrate these skills to attorneys, look at NAVBA's certification and join NAVBA for a directory listing. Attorneys looking for help can request a VBA.
This article is general information about bankruptcy practice, not legal advice. Local rules, trustee preferences and state law vary, so confirm current requirements for your jurisdiction.
