For many people considering bankruptcy, one of their biggest concerns is being forced to give up all of their personal and real property, including their home and cars. For most Chapter 7 debtors, this is an unfounded fear. Property, including homes and cars (within limitations) can be kept through a series of exemptions written into the bankruptcy laws. For many people, though, there is an added complication in that they bought big ticket items, particularly cars or a home with borrowed money. If the bankruptcy wipes out debts, how does that affect property bought with borrowed money? This is just one example of some of the Oklahoma bankruptcy information you need
Oklahoma Bankruptcy Information and Mortgages
When a person takes out a loan, such as a mortgage or an auto loan for the specific purpose of buying a particular piece of property, be it a car or a home, the lender gains a “security interest” in the property. Therefore, that debt is said to be “secured debt”. What this means is that if a person defaults on their obligation to the lender, the lender has the right to take the property, through repossession or foreclosure. In bankruptcy, one of five things generally happens to secured debts and property.
Secured Property and Oklahoma Bankruptcy Information
First, and most common, is a “reaffirmation.” A reaffirmation agreement is a voluntary contract signed by both the creditor and the debtor and filed with the court between the time the bankruptcy is filed and the time it is discharged. A reaffirmation agreement sets terms by which the debtor will continue to pay the loan and keep the property. It also means that the debt covered by the reaffirmation agreement is not discharged with the rest of the bankruptcy. While the terms of the reaffirmation, such as payment amount or interest rate, can be negotiated, in most cases they are the same as the terms of the original loan. In most cases, the creditor will require the debtor to sign a reaffirmation agreement in order to keep the property.
The benefit to reaffirmation is obviously that the debtor gets to keep the property. Less obvious, but in some ways equally important, the creditor is required to report the debtor’s ongoing payments under the reaffirmation agreement to the credit bureaus to count as a positive on their credit history. Therefore, a reaffirmation agreement can help a debtor rebuild their positive credit history more quickly post-bankruptcy. On the downside, it is important to remember that in a reaffirmation agreement, the debt is not discharged. If the creditor defaults on the reaffirmed debt, the creditor will repossess the property and the debtor will still owe any remaining balance.
Second, if the creditor does not believe that reaffirming is in their best interest they can ask the court for a “relief from the automatic stay.” When someone files bankruptcy, the bankruptcy court stops any and all collection activities against that person by their creditors. If a creditor wants to take a collection action, such as a foreclosure or repossession, they must ask the court for permission via a motion for relief from the automatic stay. This is often the case if a debtor is several months behind on payments and the creditor was either in the process of or shortly going to commence foreclosure or repossession. This is often a last ditch position for the creditor, used only when they think the debtor is so unreliable that attempting to reaffirm would not be in the creditor’s best financial interests. In most cases, the creditor would rather reaffirm and continue receiving payments from the debtor, even if that debtor is a month or sometimes even two months behind at the time of filing. In that case, the debtor is asked to make past due payments and get current before the reaffirmation is agreed to, or the past due amount is rolled into the balance of the loan and the debtor and creditor start fresh.
Third, the property can be “surrendered.” If a debtor opts to surrender the property, they return the secured property to the creditor. Any remaining debt owed to the creditor after they dispose of the secured property is discharged. If the property is sold for more than value of the debt, the creditor is required to give the balance to the debtor, though this rarely happens.
Fourth, and by far the least frequent, is “redemption”. Redemption occurs when, as a part of the bankruptcy process, the debtor agrees to immediately pay off the full unpaid portion of the loan, and thus own the property free and clear. This is extremely infrequent.
Fifth, and finally, the debt can be considered what is called “continue to pay”. This often occurs when at the time of bankruptcy, there are only a few payments, say two or three months, left to pay on the loan. In this situation, the debt is listed just as it normally would be, and, in theory, the debt is discharged at the end of the bankruptcy. However, the debtor makes the last few payments and so long as they make those payments, they keep the property. If the debtor stops making payments, the creditor can take back the secured property through repossession or foreclosure, but the debtor will owe them nothing further, as the balance of the debt has already been discharged in the bankruptcy. As noted, this is usually done in cases where only a couple of payments are left and it doesn’t make sense to take the time and bother of drafting a document to cover two or three payments.
However, this is not always the case. When the bankruptcy is filed, the debtor files a document called a “Statement of Intentions” concerning all secured property. This document states whether a debtor intends to redeem, surrender, or reaffirm secured property. If a debtor opts to reaffirm, the creditor is then supposed to prepare the reaffirmation agreement and send it to the debtor’s attorney. If the creditor fails to do so and an agreement is not filed before the discharge is granted, the debt automatically reverts to the status of continue to pay, regardless of how many payments are left on the debt.
Fears about the status of property shouldn’t dissuade a person from getting the benefits and relief of bankruptcy. If you have further questions concerning your property, secured or otherwise, contact your bankruptcy attorney.
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