Redeeming v. Reaffirming Debt to Keep Property in Bankruptcy

Learn the difference between redeeming property and reaffirming debt in Chapter 7 bankruptcy.

If you file for Chapter 7 bankruptcy and want to keep property that is encumbered by a secured debt (such as a car loan), you typically have to reaffirm the debt or redeem the property. Read on to learn more about the difference between reaffirming debts and redeeming property in Chapter 7 bankruptcy.

Reaffirming Secured Debts

When you receive a bankruptcy discharge, it wipes out your personal liability for all discharged debts. But it doesn’t eliminate a lender’s security interest (lien) on your property. As a result, you must continue to make payments on secured debts if you want to retain the collateral.

In addition, your lender will normally require you to sign a reaffirmation agreement if you want to keep the property. When you reaffirm a debt, it means that you sign a new contract with the lender and make yourself personally liable on the obligation again. In most cases, the reaffirmation agreement has the same terms as the original loan. However, you can negotiate with the lender to reduce your interest rate or principal balance. When you sign a reaffirmation agreement, the court will usually hold a hearing to decide whether to approve it or not.

If you decide not to reaffirm the debt, many lenders will still allow you to keep the property as long as you continue to make timely loan payments. But some lenders are known to repossess the property unless you reaffirm their debt even if you are current on your payments. Depending on the rules in your jurisdiction, a bankruptcy judge may deny the reaffirmation agreement but order that you can keep the collateral if you remain current on your payments.

To learn more, see Reaffirming Secured Debt in Chapter 7 Bankruptcy.

Redeeming Personal Property

Bankruptcy law also gives debtors the option to keep tangible personal property by redeeming it as long as the asset is exempt or abandoned by the bankruptcy trustee. Redeeming personal property in bankruptcy essentially means buying it back from the lender for its fair market value.

When you redeem, you pay the lender the replacement value of the property. The remainder of the lien is eliminated and you own the asset free and clear after bankruptcy.  Redeeming personal property can be a good idea if the balance of your loan is greater than the value of the property.

However, keep in mind that you typically have to pay the lender in one lump sum payment. For most debtors, this is not an option. There are lenders who specialize in redemption loans but these loans usually carry high interest rates.  

For more information, see Redeeming Property in Chapter 7 Bankruptcy.

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