What Happens to My House and Car in Chapter 7?

In Chapter 7 cases, you generally have the following four choices:

If the collateral is real estate and your payments are current on the date that you file the Chapter 7, and your equity in the collateral is covered under the exemptions, you may keep the property so long as you continue to make the monthly payments and comply with the terms of your contract. We call this the “be-current-and-stay-current” right to retention.

To be absolutely sure you can keep the personal property that secures a debt secured by personal property, you must also sign a reaffirmation agreement. Under the Bankruptcy Code, most experts think that the creditor can repossess the collateral unless you enter into an agreement reaffirming the debt within 65 to 85 days after you file the bankruptcy. We believe it is not likely that a creditor will in fact repossess collateral when you are current with your payments, but there are no guarantees. The reason that you should not want to reaffirm a debt is that the reaffirmation reinstates your personal liability on the debt. This means if you later default on the debt, you will be liable on the debt despite the fact that you filed bankruptcy. The decision on whether to reaffirm a debt may be the most important one you make in connection with your bankruptcy. We can advise you, but the final decision is yours. If your payments are not current, you can try to negotiate a reaffirmation agreement with the creditor that allows you to catch up your payments. There are two drawbacks to this option. First, you cannot be sure that you and the creditor will be able to agree upon terms that allow you to catch up your payments. Secondly, as explained above, the reaffirmation agreement reinstates your personal liability. If your payments on a mobile home loan, a mortgage, or a car loan are substantially behind or if the creditor has threatened to repossess or foreclose, you will need to file Chapter 13 to save the property.

You may redeem the property by paying the creditor the value of the collateral. The value of a vehicle is the amount for which it would be sold at retail by a used car dealer in its current condition. For example, if you owe GMAC $15,000.00 secured by a vehicle which has a retail value of $10,000, you can pay GMAC $10,000.00 and keep the vehicle. There are redemption loan financers who lend money to Chapter 7 debtors to redeem vehicle loans. Even though their rates are somewhat high, in many cases redemption loans can save you money.

Your final option is to give the property back to the creditor (“surrender” the property) and have the debt discharged.