Reaffirmation, Surrender & Redemption

Financial Obligations & Secured Debt

In a Chapter 7 bankruptcy case, the debtor's financial obligations are divided into categories. One of these categories is called secured debt.

• Typical examples include:
• Auto loans
• House mortgages
• Financed purchases of furniture

What all of these examples have in common is that they involve the concept of security, also known as “collateral.” Collateral is something the creditor can seize and sell if you miss payments. In a secured transaction (unlike a medical bill or an ordinary credit card purchase) the purchaser (you) has signed a contract to buy something, but the contract goes further than a simple promise to make payments on time. Rather, the secured contract provides that if the purchaser fails to pay on time, the lender or seller may seize the item being purchased and forcibly sell it off which will raise some money to help pay down the loan. In these situations, the purchaser is said to have offered security (also known as “collateral”) to back up the loan. These contracts are referred to as secured debts or secured loans.

Making the Right Decision for Your Debt

In a Chapter 7 filing, the debtor has to make a decision about each secured loan. For each secured loan, the debtor must choose one of the following three alternatives:

• Reaffirmation: In a reaffirmation, the debtor is signing a special bankruptcy document called a reaffirmation agreement that says that the debtor wishes the loan arrangement to continue, usually under the same terms, as though bankruptcy had never occurred. A typical example is a house mortgage where the debtor wants to stay in the house and continue with the mortgage payments.
• Surrender: The second choice a debtor has on a secured debt is surrender. Under this choice the debtor allows the lender to repossess the collateral and sell it to reduce the balance owed. Upon selling the collateral, the unpaid balance is automatically forgiven when the bankruptcy courts enters the order granting the discharge.
• Redemption: The third choice is redemption. For example, say the debtor has a car loan with First National Bank for the purchase of a Ford F-150. Let us assume that the Ford is worth $5,000 but the auto loan balance at the bank is $8,000. With this choice, the debtor pays $5,000 immediately to First National Bank in exchange for the Ford’s Certificate of Title stamped “Lien Paid.” If the bankruptcy court decides or the parties agree that the value of the Ford is indeed $5,000, then the Bank has no choice but to accept the $5,000 and release its lien on the Ford. The practical downside of Redemption is that debtors who have just filed a Chapter 7 generally do not have access to funds needed to redeem the collateral.

The Gainesville bankruptcy lawyers at Ruff & Cohen, offer helpful counsel in making decisions regarding your unsecured debts. They give honest advice and explain every possible outcome of your options.

Schedule a free consultation with our firm by calling today at (352) 376-3601!

The Process of Reaffirmation, Surrender, or Redemption

Once you have decided on what action to take for your collateral, the next step is to file a document called the Debtor’s Statement of Intentions with the bankruptcy court. The Statement of Intentions lists each secured debt and states whether the debtor intends to reaffirm the debt, surrender the collateral, or redeem the collateral. There is a deadline for the filing of the Debtor's Statement of Intentions, and that is the earlier of the following two dates: the date set for the Meeting of Creditors, or 30 days after the bankruptcy Petition was originally filed with the bankruptcy court. In common practice, lawyers file the Statement of Intentions at the same time the Petition is filed, so there is hardly ever a complete failure to file the Statement of Intentions on time when the debtor is represented by counsel.

Once the debtor files his Statement of Intentions on time, he must act on that stated intention. The deadline to act is 30 days after the date for creditors' meeting. If the collateral is real estate, then there is no automatic penalty.

Call our Jacksonville firm at (352) 376-3601 and have your case evaluated for free!