Secured Collateral Reaffirmation, Redemption, and Surrender

if a piece of property serves as collateral for a debt then that debt is secured by that piece of property. Usually houses serve as collateral as do vehicles for the debt people incur when purchasing or refinancing said house or car. If you file a Chapter 7 and you owe secured debt then you will need to choose how you want to handle that debt

Reaffirmation, Redemption, and Surrender of secured collateral.

Your first choice is to surrender or give back the item that serves as security for the debt in exchange for not being held liable for the rest of the debt (the amount of the debt over the value of the collateral). If the collateral is worth more than the debt then you are entitled to receive the equity assuming it is exempt from the bankruptcy estate otherwise the equity is an asset of the estate and the trustee will want to sell the item to get at the equity.

Your second choice is call reaffirmation. A reaffirmation agreement is an agreement to be bound post-discharge to a pre-bankruptcy debt in exchange for being able to keep the item in question. This is usually used with car loans. It allows you to keep making payments on the vehicle during the bankruptcy and to keep the vehicle after the bankruptcy, however that debt will not be discharged at the end of your bankruptcy and you will still be personally liable on the debt so you have to consider this option carefully. I usually only advise this option if you already have a good deal or are getting a better deal in exchange for reaffirming the debt.

Your third choice is called redemption. This option is rare because it requires you to “buy” the collateral out of the bankruptcy by paying the creditor the current market value of the collateral in a lump sum in exchange for a discharge of the rest of the debt. This option requires you to have non-exempt cash to be able to afford to pay the current market value of the collateral in a lump sum. Most people in bankruptcy cannot afford to take advantage of this option. This is a better option for Chapter 13 (more on that later).