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Learn the difference between a charge off and a repossession and how they’re handled in bankruptcy cases.

A charge off and a repossession are two very different things—although both could happen to one debt. In this article, you’ll learn what each term means, as well as how the bankruptcy court handles these events in Chapter 7 and Chapter 13 bankruptcy.

What Is a Charge Off?

“Charge off” is an accounting term that simply means that the account has been removed from the company’s books because no payments have been made in 120 to 180 days (depending on the type of account.)

Most people come across the term “charge off” after reviewing a credit report. Because a charge off is associated with an unpaid debt, many assume that charged off means that the debt is no longer collectible and that you no longer owe the money. That’s not the case.

A notation of a charge off indicates that the lender is no longer showing the account as a bad debt on the bottom line. That usually doesn’t stop the lender’s collection efforts. The lender can continue trying to collect the debt. Often the lender will transfer or sell the debt to a collection agency. In turn, the collection agency either collects the debt for the lender or, if the collection agency purchased the debt, collects it for its own benefit. Either way, a charge off is merely an accounting term, and you still owe the debt.

The Federal Reserve requires a lender to charge off a credit card debt when it is 180 days late. A car loan or installment loan must be charged off when it is 120 days late.

Can a Charged Off Loan be Reinstated?

Once a loan is charged off, don’t count on the loan showing up on the company’s books again. Even if you offer to pay it, chances are it’s been transferred or sold and the original company no longer has an interest in it. If you pay the debt, the company that purchased the account should show that you paid it off, but unfortunately, the original lender can continue reporting the charge off for seven years.

How are Charge Offs Treated In Bankruptcy?

When you file for bankruptcy, you agree to disclose your entire financial situation in exchange for the benefits provided by the chapter that you file. (Find out which bankruptcy will be better for you in What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?)

You must list all debts when you fill out your bankruptcy paperwork—including charged off accounts. If you don’t list them, you risk the debts not being discharged (wiped out). All kinds of debt can be charged off, including car loans and other debt secured by collateral, and unsecured debt, like a credit card balance, medical bill, or personal loan. If you file for Chapter 7 bankruptcy, you can expect the court to discharge the charged-off debt within three to four months (the average time it takes for a Chapter 7 case to end). In a Chapter 13 bankruptcy, you’ll pay any discretionary income—the amount remaining after paying allowed monthly expenses—to your unsecured creditors over the course of your Chapter 13 bankruptcy payment plan. All eligible unsecured debts get discharged when you complete your plan.

If the charge off is a secured debt—such as a car loan or mortgage—then you’ve likely already lost the collateral (the house or the car) through repossession (see below) or foreclosure. In that case, you’ll list the account as an unsecured debt in your bankruptcy paperwork.

If a debt has been charged off but you still have the collateral, and you’d like to keep it, you should speak with a bankruptcy attorney as soon as possible.

What Is a Repossession?

A repossession occurs when a creditor takes possession of the collateral—usually a car—that you put up when taking out a loan. Here’s how it works.

Before a lender agrees to lend you money for a car purchase, you must agree to guarantee payment of the loan with the vehicle. The contract creates a lien in favor of the lender. The lien allows the lender to take the car, sell it, and apply the sales proceeds to the loan if you default on your payment. If the auction price isn’t enough to pay off the loan, you’ll still owe the remainder called a “deficiency balance.” (The lender releases the lien on the car after you pay the loan balance.)

Can a Loan on a Repossessed Car be Reinstated?

If you lose the car to repossession, most state laws will give you some time to get the car back. The process is called “reinstating the loan.” Reinstatement requires you to pay any past-due amount, as well as the lender’s costs for the repossession.

Repossessions can occur with property other than cars as well. Furniture, jewelry, and other personal property pledged to secure a loan can be repossessed, as long as the lender follows the state laws.

Can a Car Loan be Charged Off Without a Repossession?

It’s possible to charge off a loan without having the dealer repossess the car. As stated earlier, car loans are supposed to be charged off if no payment has been made for 120 days. But, unsecured debt, like credit cards or medical accounts, can stay on the books until they’re 180 days old. Usually, a lender will repossess the collateral and sell it, long before 120 days pass. Almost always, the proceeds of the sale won’t be enough to cover what’s owed on the loan, and most lenders will need to charge off the remaining balance.

No law requires the lender to repossess the collateral before charging off the loan. The lender could choose to do it the other way around or could choose not to repossess the car at all. The lender might be forced to forgo repossession if the car can’t be located or if the car’s value is less than it would cost to sell at auction (for instance, if the car was totaled in an accident). The lack of a repossession doesn’t alter the need to charge off the loan or prevent the lender from selling the charged off loan to a debt buyer.

How are Repossessions Treated In Bankruptcy?

If your car is repossessed before the bankruptcy is filed, you might be able to reinstate the loan and regain possession of the car, but you have to work quickly. You’ll have to file a Chapter 13 bankruptcy case and propose a three to five-year repayment plan.

In Chapter 13 bankruptcy, it’s possible to reinstate a loan by including it in your repayment plan. In fact, this is one of the key benefits of a Chapter 13 bankruptcy case. Not only will it stop a repossession (or a foreclosure) in its tracks, but you can spread out your payment arrearages over the repayment plan rather than paying the entire overdue amount right away. You’ll have to continue paying your monthly payments, too, but by the end of the payment plan, you’ll own the car free and clear. If you don’t want to keep the car, the balance owed will get discharged (wiped out) with other qualifying debt at the end of your plan.

Filing a Chapter 7 case instead will not help you get your car back, because Chapter 7 has no mechanism for getting you caught up or reinstating the loan.

Which is Worse: Charge Off or Repossession?

If you default on your car loan, you could suffer a charge off, a repossession, or both. It’s hard to know whether the charge off or the repossession looks worse on your credit report. Credit scores are based on all the information in your credit report, good and bad, and the credit reporting agencies and companies that produce credit scores like the FICO score keep their scoring models a secret. Someone having trouble with one account like a car loan often has difficulty keeping other accounts in line. Your credit score can take a hit from late car payments, repossessions, past due credit card payments, judgments, tax liens, and other negative or derogatory entries.

Experience tells us that both a repossession and a charge off of the car loan can cause a significant hit, maybe as much as 100 points. Not only will both a repossession and a charge off have a profound effect on your score in the short run, but they will also continue to influence your credit score and the credit decisions of potential lenders for seven years (although the derogatory information has less effect on your credit score the older it gets.)

Source

https://www.nolo.com/legal-encyclopedia/the-differences-between-a-charge-off-and-repossession-in-bankruptcy.html

Most people seek bankruptcy relief to wipe out their debts and get a fresh start. While you can eliminate many debts in bankruptcy, certain obligations (called nondischargeable debts) survive your bankruptcy discharge. Read on to learn more about the difference between dischargeable and nondischargeable debts and how they are treated in bankruptcy.

What Are Dischargeable Debts?

Dischargeable debts are obligations that can be wiped out by your bankruptcy discharge. When you receive your discharge, you are no longer obligated to pay any of these debts and creditors cannot come after you to collect them.

A few examples of dischargeable debt include:

• credit card debt
• medical bills
• personal loans made by friends, family, and others, and
• past-due utility bills.

Timing and Debt Dischargeability

If a bill comes due after you file for bankruptcy, you might find yourself wondering whether the balance will go away. It’s common to be confused about whether ongoing accounts, such as utility bills, get completely wiped out at the end of the case, or whether the bankruptcy discharge is limited to the portion owed before the filing date.

Post-petition debts—the new bills that you incur after you file your initial bankruptcy paperwork—don’t qualify for discharge. You’ll remain responsible for paying for them. The only type of debt eligible for discharge is “pre-petition debt,” or, debt that existed before you filed your matter.

Example. Suppose that you file a Chapter 7 case. In your bankruptcy schedules, you list your overdue water, sewer, and garbage bill. The Chapter 7 discharge will wipe out any portion of the utility bill account balance that predated your filing. However, you’ll be required to pay any charges that accrued after your filing date.

The same holds true in a Chapter 13 bankruptcy. All pre-petition debts get included in the Chapter 13 plan (the three- to five-year payment plan that you must complete before receiving a discharge). All of your post-petition debts, such as a monthly cell phone bill or a new gym membership, remain your responsibility to pay.

Be aware, however, that when you’re in a Chapter 13 case, unexpected obligations can come up. Not only is this understood, but the court might be willing to adjust your plan payments to accommodate you. To learn about your options, read Post-Petition Debts in Chapter 13 Bankruptcy.

How Are Dischargeable Debts Treated in Bankruptcy?

In most cases, you can eliminate dischargeable debts in bankruptcy without any repayment. However, whether your creditors will receive anything in your bankruptcy will depend on whether you are filing for Chapter 7 or Chapter 13 bankruptcy.

Dischargeable Debts in Chapter 7 Bankruptcy

Most Chapter 7 bankruptcies are no asset cases—there’s nothing for the trustee to sell to pay creditors with. As a result, dischargeable debts are typically wiped out without receiving anything in Chapter 7 bankruptcy.

Further, if there are any proceeds to distribute, general unsecured debts (such as credit card obligations) are the last to get paid and receive a pro-rata share of any money left over after all priority debts (such as alimony, child support, and some taxes) get paid.

However, keep in mind that your discharge only eliminates your liability for these debts. It does not affect liens on your property (such as a mortgage or car lien). As a result, if you stop paying your mortgage or car loan, your lender can still foreclose on or repossess your property even if it cannot sue you personally to collect the debt.

Dischargeable Debts in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, most dischargeable debts are considered nonpriority general unsecured claims. Depending on your income, assets, and expenses, they typically receive little or nothing through your Chapter 13 repayment plan. And they are discharged upon completion of your plan payments.

However, if a dischargeable debt is secured (such as your car loan), you have two choices. If you want to keep the car, you must continue making payments on it during your Chapter 13 bankruptcy (if you meet certain conditions, you might be able to reduce your principal balance through a Chapter 13 cramdown). Alternatively, you can surrender the car, and discharge your liability for the car loan.

Source: https://www.nolo.com/legal-encyclopedia/what-is-the-difference-between-dischargeable-nondischargeable-debts-bankruptcy.html

In bankruptcy, your personal obligation to pay a secured debt may be discharged, but the lien remains in place.

A creditor’s lien typically endures Chapter 7 bankruptcy. If the debtor doesn’t make the agreed-upon payments while the lien is active, the creditor may seize the property once the bankruptcy process is over.

How Do Liens Work?

Nobody hates to lose money, not even lenders, and when a loan is required to make a large purchase like a house or car, the danger of loss is greater still. By forcing the borrower to acknowledge that the creditor may seize the collateralized property if the debt is not paid as agreed, lenders reduce this risk. This contract grants the creditor a “lien,” or ownership stake in the property.

When a lender recovers property, they often auction it off and apply the money to the outstanding loan sum. In most situations, the borrower will still be liable for the remaining sum, or “deficiency balance,” if the auction price is less than what is owing.

Remember that in some states, shortfall balances on particular transactions are not permitted. A deficit balance will also be eliminated in Chapter 7 bankruptcy; see more below.

“Secured Debt” is created via Liens in Chapter 7 Bankruptcy

You must classify your debts as either secured or unsecured if you have already begun putting together your bankruptcy petition. A loan with a charge against it? It is locked. No liens? It’s unprotected.

Chapter 7 Bankruptcy: Voluntary and Involuntary Liens

If the lien is voluntary, it was put on your property with your consent; if it is involuntary, it was done so against your will. Why is this important? because you might be unaware that a creditor has a secured debt against you and that you have a lien on your property.

Liberties Liens

In the course of a mortgage or vehicle note transaction, it’s typical to consent to granting a lien to a creditor. You are probably aware that the creditor’s lien could cause you to lose your home to foreclosure or your car to repossession because you agreed to those terms when you financed the property.

But when buying items like jewelry, furniture, electronics, beds, equipment, and computers on credit, many people are unaware that they are agreeing to a lien. Check your agreement or invoice.

Statutory Liens Without Consent

It’s common to have liens placed against your property without being aware of them because certain creditors have the legal authority to do so without your knowledge.

For instance, if you don’t pay your tax due, the Internal Revenue Service (IRS) may place a lien on your property. If you don’t pay your dues, your homeowners’ association may place a lien on your home. Or, if you don’t pay for repairs, a contractor could put a lien on your house.

Liens for Involuntary Judgments

By filing a lawsuit against the borrower and utilizing the money judgment to put a lien on your property, some creditors can convert an unsecured debt into a secured debt.

Medical bills, credit card balances, and other unsecured debt are all considered judicial liens.
After an unsecured creditor obtains a judicial lien and transforms into a secured creditor, many people apply for Chapter 7 bankruptcy.

By filing a lawsuit against a borrower, succeeding, and obtaining a “money judgment” against the borrower for the amount owing plus fees and costs, a creditor can establish a “judicial” or “judgment” lien. A money judgment holder may register it against the borrower’s real estate.

Any property owned by the borrower that is not real estate is considered personal property, and in some states, the money judgment immediately grants the creditor a lien on that property.

How to Obtain a Money Judgment as an Unsecured Creditor

The procedure begins when the debtor is unable to make a payment on an unsecured obligation, like an outstanding credit card amount or overdue rent. You do not provide the creditor with collateral to secure these debts, thus the creditor cannot compel payment absent a judicial ruling.

A creditor will initiate a civil lawsuit if they feel that the debt is significant enough to warrant the expense of legal action. The court will issue a “default” money judgment and the creditor will be declared the winner if the borrower doesn’t reply.

If the borrower loses after submitting an answer to the complaint in the litigation, the court will also issue a money judgment. read about litigation that bankruptcy averted.

How a Money Judgment Becomes a Lien in the Mind of the Creditor

After receiving a monetary judgment, a creditor is deemed a “judgment creditor” and is required to “perfect” or establish an enforceable lien. Perfecting the lien often happens after the money judgment has been recorded at the recorder’s office or after adhering to other state legal requirements.

Advantages of a Perfected Lien

Once perfected, the lien will be paid out of the sale proceeds if the borrower sells real estate within the recorder’s authority (often the county). Before distributing money to the house seller, the title firm managing the transaction examines whether any recorded liens exist and pays them.

Personal property may also be encumbered by judicial liens. However, the majority of people have exemptions that allow them to defend their vehicles and home goods, therefore these targets are rarely used. Most states allow persons to use the same exemptions that are available in bankruptcy to safeguard property from creditors.

Use of Money Judgments by Creditors in Other Ways

A money judgment can be used by a judgment creditor for purposes other than creating liens. Most take use of money judgements to take money from the borrower’s bank account (bank levy) or take money out of their paycheck (wage garnishment).

How Are Liens Affected by Chapter 7 Bankruptcy?

This topic can be challenging to understand, but it can be summed up as follows:

Your need to pay a secured debt, such as a mortgage or car payment, will probably be eliminated if you file for Chapter 7 bankruptcy.
If you don’t pay what you owe, the creditor can still seize the collateral (the house, car, or other property) because Chapter 7 bankruptcy won’t remove a voluntary lien.
When a judgment lien prohibits you from benefiting from an exemption, you can seek the court to set it aside. For instance, you may seek the court to remove the lien on up to $15,000 of your property equity if an exemption allowed you to keep the remaining $15,000 of equity.

Why Liens Are Not Automatically Eliminated by Chapter 7

After Chapter 7, a creditor cannot pursue you for a debt that has been discharged by your bankruptcy since filing for bankruptcy releases you from the obligation to pay. When a lien is in place and you don’t make the agreed-upon payments, Chapter 7 does not affect your obligation to return the property.

Therefore, even if the creditor cannot physically force you to pay your debt, if you refuse to do so voluntarily, the creditor may seize your property. This outcome results from the fact that a secured transaction includes two main components:

Your duty to reimburse the creditor. You are liable for paying the total debt. In the event that the debt is eligible for the bankruptcy discharge, filing for bankruptcy will discharge your personal duty for it. This implies that the creditor is prevented from subsequently filing a lawsuit against you to recover the debt and from using the judicial lien (discussed above) to garnish your earnings or deduct funds from your bank account.

The ability of the creditor to reclaim the collateral through the lien. Your creditor has the right to use the proceeds from the sale of the collateral used to secure the loan to offset any amounts you owe. If you don’t pay the loan, the lien enables the creditor to seize the property and force its sale. The lender has the right to sue you for the value of the collateral if it isn’t available. Even if you transfer ownership of the property to another party, a lien remains on it. A lien is not removed by bankruptcy on its own.
Example. Mary purchases a couch from a furniture retailer using credit. She agrees to pay for the couch over the following year by signing a contract. According to the contract, the couch has a security interest in favor of the creditor (the store), who has the right to reclaim it if any payment is more than 15 days overdue. In a secured debt of this kind, the lien is the store’s right to take back the couch, and Mary’s responsibility to pay the loan is her personal liability. She is no longer obligated to pay for the couch after filing for bankruptcy, but the creditor still has a lien on it and has the right to take it back if she doesn’t.

You might be able to take extra actions during bankruptcy to get rid of or at least lessen liens on collateral for security interests. See Avoiding Liens in Bankruptcy for further information.

Lenders Must Make Their Liens Perfect

A security interest agreement only counts as a secured debt for bankruptcy purposes if the creditor reports the lien with the proper municipal or state records office to “perfect” the lien. In order to establish a lien on real estate, for instance, the mortgage holder (the bank or another lender) normally needs to record the lien with the county’s recorder’s office.

The holder of a security interest must typically record it with the state or municipal agency that handles UCC recordings (also known as “UCC recordings”) in order to perfect a security interest in a vehicle or commercial asset. Typically, this is the secretary of state.

Why File for Bankruptcy Under Chapter 7?

Why then may declaring Chapter 7 bankruptcy be preferable than allowing the property or automobile to go through a foreclosure or repossession? It eliminates your need to repay the full loan, including any outstanding shortfall sum, is the solution.

Due to the fact that forgiven debt is treated as income, it may also occasionally preclude the assessment of a tax liability. For instance, if you permit the foreclosure of your home and the lender forgives the unpaid sum, you can be hit with a big tax payment at the end of the year.

In Chapter 7 bankruptcy, secured debts are handled differently than other debt types.

The majority of people have a loan that is backed by real estate, like a mortgage or a car loan. In Chapter 7 bankruptcy, these obligations, often known as secured debts, can be challenging. Even while the secured debt itself can be eliminated (discharged) and frequently is, the creditor will still retain the power to repossess the property if you fall behind on your payments (default).Your options in Chapter 7 bankruptcy will depend on whether you’re current on your loan payments and whether you wish to maintain any collateral for the loan, such as a house or a car.

A Secured Debt: What Is It?

Almost always, if you’re making payments on a piece of property, you’ve agreed that the asset will be used as security for the debt’s repayment. If you stop making payments, the creditor (or lender) may seize the home, sell it, and file a lawsuit against you (a deficiency judgment) to recover the difference between what you owe and what the home sells for at the auction (however, some states have laws against deficiency judgments).

A secured loan includes two components:

Personal responsibility Just like with any other obligation, you are personally liable for secured debt. You have a duty to make the required payment to the creditor. If this personal liability falls among the categories of debt that bankruptcy allows for discharge, Chapter 7 bankruptcy eliminates it. The creditor cannot file a lawsuit against you to recoup the debt once your personal liability has ended.

Chapter 7 bankruptcy options

If you qualify for Chapter 7 bankruptcy, you can do the following with property used to secure debts:

Let the bank receive the property back. By giving up the property and paying off the underlying loan, you can go with no further obligation. All filers have access to this choice.
Keep the house and keep paying the mortgage. As long as your payments are up to date and you have an exemption in place to safeguard your equity, you may continue to be bound by the terms of your contract. The debt is reaffirmed throughout this procedure.
Pay the property’s fair market value. If you can safeguard your equity with an exemption and the property satisfies other restrictions (for example, you cannot redeem real estate), you may keep the property by redeeming it (paying what it is worth in one lump sum payment).

Can You Exempt (Keep) The Equity In Your Property?

When you declare bankruptcy, you can protect some assets, but there are restrictions. The exemptions that your state permits will also determine whether you are eligible to maintain a certain asset. The bankruptcy trustee appointed to your case will sell the asset for the benefit of your creditors if you are unable to preserve all of the equity.

Example. Consider the scenario where you owe $3,000 on a car that is worth $6,000 and have $3,000 in equity, and your state’s vehicle exemption will allow you to save $1,000. Most likely, you wouldn’t be permitted to keep the vehicle. Instead, the trustee would sell it, give you your $1,000 exemption in cash, pay your secured creditor the remaining $3,000 you still owe on it, and then divide the remaining $2,000 (minus the costs of selling and the trustee’s compensation) among creditors.

Even still, borrowers of secured loans frequently owe more than the asset used to secure the loan is worth, which implies that they have no equity in the asset. The trustee won’t be able to sell the property if you don’t own any equity in it or if it is entirely protected by an exemption. By redeeming the item or reaffirming the debt, you might keep the asset.

What Is a Chapter 7 Bankruptcy Reaffirmation?

When you reaffirm a debt, you agree that you will still owe it after your bankruptcy case ends. Both the creditor’s lien on the collateral (which gives the creditor the right to take the property if you fail to pay as agreed) and your liability to pay the debt will survive bankruptcy intact.

 

In most cases, it will be as if you never filed for bankruptcy for that debt.

 

Advantages to Reaffirmation in Chapter 7

Reaffirmation provides a sure way to keep collateral as long as you abide by the terms of the reaffirmation agreement and keep up your payments. If you stay current on the payment, the lender won’t be able to take back the property.

 

Reaffirmation also provides an opportunity to negotiate new terms to reduce your payments, your interest rate, or the total amount you will have to pay over time. However, the lender doesn’t have to agree to new terms and most reaffirmation agreements are on the original contract terms.

How Reaffirmation Affects Your Chapter 7 Bankruptcy

Because reaffirmation leaves you personally liable for the debt, you can’t walk away from the debt after bankruptcy. You’ll still be legally bound to pay the deficiency balance even if the property is damaged or destroyed. And because you have to wait eight years before filing another Chapter 7 bankruptcy case, you’ll be stuck with that debt for a long time.

For instance, if you reaffirm your car note and then default on your payments after bankruptcy, the creditor can (and probably will) repossess the car, auction it off, and bill you for the difference between what you owe and what the trustee received at auction.

Example 1. Suppose you owe $25,000 on your car before filing for Chapter 7 bankruptcy. You most likely will continue to owe $25,000 on your car after you file for bankruptcy (unless you negotiate a lower amount in your reaffirmation agreement). If you can’t keep up your payments and the car is repossessed, you’ll owe the difference between the $25,000 reaffirmation amount and the amount the lender sells the car for at auction, or “deficiency balance,” which will be considerably less than you owe, in most cases). Nearly all states permit a creditor to sue for a deficiency balance. However, about half of the states don’t allow deficiency balances on repossessed personal property if the original purchase price was less than a few thousand dollars.

Example 2. Tasha owes $1,500 on a computer worth $900 and reaffirms the debt for the full $1,500. Two months after bankruptcy, she spills a soft drink ruining the computer. Because she reaffirmed the obligation, she still must pay the creditor the remaining balance.

Restrictions on Reaffirmation

The first step is ensuring the Chapter 7 bankruptcy trustee won’t sell your property. If you can’t protect all of the equity with a bankruptcy exemption, the trustee will sell it, pay the lender, give you the exemption amount, and use the remaining proceeds to pay unsecured creditors.

However, if you can protect all of the property equity, you can use a reaffirmation agreement and continue paying on “secured” property that’s encumbered by a lien. You and the creditor must agree to any change in terms.

Also, you or the lender must file the agreement in court as part of the bankruptcy case. The bankruptcy court must review the agreement in a reaffirmation hearing if an attorney does not represent you. If you have a lawyer, the lawyer must sign the agreement and attest that you can afford the payment and that it won’t cause undue financial hardship.

At the hearing, the judge will consider how the reaffirmation might affect your post-bankruptcy budget and whether you can afford the payments. The judge can reject the agreement if it isn’t in your best interest or would create an undue hardship for you or your family.

Reaffirmation agreement rejections occur when it appears that you can’t afford the payments after paying your basic living expenses or if you owe much more on the debt than the property is worth. The bankruptcy judge will make this determination after reviewing the income and expense forms filed with the bankruptcy petition in your case.

When to Enter Into a Reaffirmation Agreement

Sometimes a lender will let you keep a car or other property without filing a reaffirmation agreement as long as you continue making your payment. This is a good way to go because if the lender repossesses the property because you can’t make your payments, or you let the car go back to the lender after an accident, you won’t be responsible for paying anything further.

That won’t be the case if you enter into a reaffirmation agreement. Because reaffirming a debt comes with the disadvantage of leaving you in debt after your bankruptcy case ends, you should consider it only if:

 

• the creditor insists on it
• it’s the only way to keep property you need, and
• you have good reason to believe you’ll be able to pay off the balance.

Reaffirmation might be the only practical way to keep some property types, such as automobiles or your home. Also, reaffirmation can be a sensible way to keep property that is worth significantly more than what you owe on it.

If you decide to reaffirm a debt, it’s usually worth asking the creditor to accept less than you owe as full payment. For most people, it’s not a good idea to reaffirm a debt for more than what it would cost you to replace the property.

Keep Current on Payments You Wish to Reaffirm

If you need the collateral, you’ll want to be current on your payments before filing for bankruptcy to stay on the creditor’s good side. If you fall behind, the creditor can demand that you bring your account current before agreeing to a reaffirmation contract.

Differences Between Collateral and Secured Debt

It’s common to wonder how secured and unsecured debts differ. The answer is simpler than you might think.

When applying for a credit account or taking out a loan, the lender might ask you to put up collateral (valuable property) that it can sell if you fail to pay your bill—especially when borrowing a large sum of money. The collateral assures or guarantees the lender that it will get paid if you stop making your payment as agreed.

Securing a loan with collateral creates a “lien” on the property, a type of ownership interest that remains until the borrower pays off the debt. The lien interest gives a creditor the right to repossess your vehicle if you fail to make your payment. Likewise, if you fall behind on your mortgage, the lien will allow the lender to foreclose on your home.

A bank or creditor who owns a collateralized debt has what is called a “secured debt.” If the bank seeks reimbursement in a bankruptcy case, it will file a “secured claim.” If the bankruptcy trustee sells the property, the trustee must pay the secured lender first before distributing funds to unsecured creditors.

However, not all creditors require a borrower to provide security when making a loan or providing a credit service. An “unsecured” creditor doesn’t have a lien interest in collateral, so it can’t sell the borrower’s property to pay off the debt without doing more.

Credit cards, medical bills, and personal loans, such as payday loans are all examples of unsecured debt. An unsecured creditor can gain a security interest by winning a debt collection lawsuit and recording the money judgment with the local recorder’s office or the appropriate state agency.

In bankruptcy, your personal obligation to pay a secured debt may be discharged, but the lien remains in place.

A creditor’s lien typically endures Chapter 7 bankruptcy. If the debtor doesn’t make the agreed-upon payments while the lien is active, the creditor may seize the property once the bankruptcy process is over.

How Do Liens Work?

Nobody hates to lose money, not even lenders, and when a loan is required to make a large purchase like a house or car, the danger of loss is greater still. By forcing the borrower to acknowledge that the creditor may seize the collateralized property if the debt is not paid as agreed, lenders reduce this risk. This contract grants the creditor a “lien,” or ownership stake in the property.

When a lender recovers property, they often auction it off and apply the money to the outstanding loan sum. In most situations, the borrower will still be liable for the remaining sum, or “deficiency balance,” if the auction price is less than what is owing.

Remember that in some states, shortfall balances on particular transactions are not permitted. A deficit balance will also be eliminated in Chapter 7 bankruptcy; see more below.

“Secured Debt” is created via Liens in Chapter 7 Bankruptcy

You must classify your debts as either secured or unsecured if you have already begun putting together your bankruptcy petition. A loan with a charge against it? It is locked. No liens? It’s unprotected.

Chapter 7 Bankruptcy: Voluntary and Involuntary Liens

If the lien is voluntary, it was put on your property with your consent; if it is involuntary, it was done so against your will. Why is this important? because you might be unaware that a creditor has a secured debt against you and that you have a lien on your property.

Liberties Liens

In the course of a mortgage or vehicle note transaction, it’s typical to consent to granting a lien to a creditor. You are probably aware that the creditor’s lien could cause you to lose your home to foreclosure or your car to repossession because you agreed to those terms when you financed the property.

But when buying items like jewelry, furniture, electronics, beds, equipment, and computers on credit, many people are unaware that they are agreeing to a lien. Check your agreement or invoice.

Statutory Liens Without Consent

It’s common to have liens placed against your property without being aware of them because certain creditors have the legal authority to do so without your knowledge.

For instance, if you don’t pay your tax due, the Internal Revenue Service (IRS) may place a lien on your property. If you don’t pay your dues, your homeowners’ association may place a lien on your home. Or, if you don’t pay for repairs, a contractor could put a lien on your house.

Liens for Involuntary Judgments

By filing a lawsuit against the borrower and utilizing the money judgment to put a lien on your property, some creditors can convert an unsecured debt into a secured debt.

Medical bills, credit card balances, and other unsecured debt are all considered judicial liens.
After an unsecured creditor obtains a judicial lien and transforms into a secured creditor, many people apply for Chapter 7 bankruptcy.

By filing a lawsuit against a borrower, succeeding, and obtaining a “money judgment” against the borrower for the amount owing plus fees and costs, a creditor can establish a “judicial” or “judgment” lien. A money judgment holder may register it against the borrower’s real estate.

Any property owned by the borrower that is not real estate is considered personal property, and in some states, the money judgment immediately grants the creditor a lien on that property.

How to Obtain a Money Judgment as an Unsecured Creditor

The procedure begins when the debtor is unable to make a payment on an unsecured obligation, like an outstanding credit card amount or overdue rent. You do not provide the creditor with collateral to secure these debts, thus the creditor cannot compel payment absent a judicial ruling.

A creditor will initiate a civil lawsuit if they feel that the debt is significant enough to warrant the expense of legal action. The court will issue a “default” money judgment and the creditor will be declared the winner if the borrower doesn’t reply.

If the borrower loses after submitting an answer to the complaint in the litigation, the court will also issue a money judgment. read about litigation that bankruptcy averted.

How a Money Judgment Becomes a Lien in the Mind of the Creditor

After receiving a monetary judgment, a creditor is deemed a “judgment creditor” and is required to “perfect” or establish an enforceable lien. Perfecting the lien often happens after the money judgment has been recorded at the recorder’s office or after adhering to other state legal requirements.

Advantages of a Perfected Lien

Once perfected, the lien will be paid out of the sale proceeds if the borrower sells real estate within the recorder’s authority (often the county). Before distributing money to the house seller, the title firm managing the transaction examines whether any recorded liens exist and pays them.

Personal property may also be encumbered by judicial liens. However, the majority of people have exemptions that allow them to defend their vehicles and home goods, therefore these targets are rarely used. Most states allow persons to use the same exemptions that are available in bankruptcy to safeguard property from creditors.

Use of Money Judgments by Creditors in Other Ways

A money judgment can be used by a judgment creditor for purposes other than creating liens. Most take use of money judgements to take money from the borrower’s bank account (bank levy) or take money out of their paycheck (wage garnishment).

How Are Liens Affected by Chapter 7 Bankruptcy?

This topic can be challenging to understand, but it can be summed up as follows:

Your need to pay a secured debt, such as a mortgage or car payment, will probably be eliminated if you file for Chapter 7 bankruptcy.
If you don’t pay what you owe, the creditor can still seize the collateral (the house, car, or other property) because Chapter 7 bankruptcy won’t remove a voluntary lien.
When a judgment lien prohibits you from benefiting from an exemption, you can seek the court to set it aside. For instance, you may seek the court to remove the lien on up to $15,000 of your property equity if an exemption allowed you to keep the remaining $15,000 of equity.

Why Liens Are Not Automatically Eliminated by Chapter 7

After Chapter 7, a creditor cannot pursue you for a debt that has been discharged by your bankruptcy since filing for bankruptcy releases you from the obligation to pay. When a lien is in place and you don’t make the agreed-upon payments, Chapter 7 does not affect your obligation to return the property.

Therefore, even if the creditor cannot physically force you to pay your debt, if you refuse to do so voluntarily, the creditor may seize your property. This outcome results from the fact that a secured transaction includes two main components:

Your duty to reimburse the creditor. You are liable for paying the total debt. In the event that the debt is eligible for the bankruptcy discharge, filing for bankruptcy will discharge your personal duty for it. This implies that the creditor is prevented from subsequently filing a lawsuit against you to recover the debt and from using the judicial lien (discussed above) to garnish your earnings or deduct funds from your bank account.

The ability of the creditor to reclaim the collateral through the lien. Your creditor has the right to use the proceeds from the sale of the collateral used to secure the loan to offset any amounts you owe. If you don’t pay the loan, the lien enables the creditor to seize the property and force its sale. The lender has the right to sue you for the value of the collateral if it isn’t available. Even if you transfer ownership of the property to another party, a lien remains on it. A lien is not removed by bankruptcy on its own.
Example. Mary purchases a couch from a furniture retailer using credit. She agrees to pay for the couch over the following year by signing a contract. According to the contract, the couch has a security interest in favor of the creditor (the store), who has the right to reclaim it if any payment is more than 15 days overdue. In a secured debt of this kind, the lien is the store’s right to take back the couch, and Mary’s responsibility to pay the loan is her personal liability. She is no longer obligated to pay for the couch after filing for bankruptcy, but the creditor still has a lien on it and has the right to take it back if she doesn’t.

You might be able to take extra actions during bankruptcy to get rid of or at least lessen liens on collateral for security interests. See Avoiding Liens in Bankruptcy for further information.

Lenders Must Make Their Liens Perfect

A security interest agreement only counts as a secured debt for bankruptcy purposes if the creditor reports the lien with the proper municipal or state records office to “perfect” the lien. In order to establish a lien on real estate, for instance, the mortgage holder (the bank or another lender) normally needs to record the lien with the county’s recorder’s office.

The holder of a security interest must typically record it with the state or municipal agency that handles UCC recordings (also known as “UCC recordings”) in order to perfect a security interest in a vehicle or commercial asset. Typically, this is the secretary of state.

Why File for Bankruptcy Under Chapter 7?

Why then may declaring Chapter 7 bankruptcy be preferable than allowing the property or automobile to go through a foreclosure or repossession? It eliminates your need to repay the full loan, including any outstanding shortfall sum, is the solution.

Due to the fact that forgiven debt is treated as income, it may also occasionally preclude the assessment of a tax liability. For instance, if you permit the foreclosure of your home and the lender forgives the unpaid sum, you can be hit with a big tax payment at the end of the year.

Credit Counseling: The “First” Course

Before filing for bankruptcy, you must be certain that it is the best option, as it can have serious and long-lasting effects on your credit, possessions, and income. The first course, pre-filing credit counseling, helps you determine whether bankruptcy is the best option. In this course, you will evaluate your financial situation and investigate alternative repayment options. If, after completing the course, it still makes sense to file for bankruptcy, you will submit a certificate of course completion along with your petition and schedules to demonstrate that you fulfilled the education requirement (the official paperwork that initiates the case). You can take the course online or over the phone and most people complete it in an hour or two.

Educating Debtors: The “Second” Course

You’ll take the post-filing debtor education course (or “second” class) after you file your bankruptcy. The second course will provide you with financial management tools that you’ll be able to rely on after your bankruptcy is over.

In a Chapter 7 bankruptcy, you must file your completion certificate with the court no later than 60 days after the date first set for the 341 meeting of creditors (the hearing that all bankruptcy filers must attend) (the hearing that all bankruptcy filers must attend). The court will remind you by sending a notice entitled “Notice of Requirement to File a Certification of Completion of Course in Personal Financial Management.” Chapter 11, 12, and 13 filers can submit the completion certificate anytime before making the final payment under the repayment plan.

Not only is it easy to forget to complete the coursework, but failure to submit the certificate will result in a fine. The court will dismiss your lawsuit without discharging (wiping out) your qualifying debt, and you’ll have to refund the filing fee to reopen it. Worse yet, in many courts, you won’t be able to file the certificate until you file a motion asking the court to accept the late-filed certificate and the judge grants your request (and you might have to file an additional motion asking for your discharge) (and you might have to file an additional motion asking for your discharge).

Who Must Complete the Courses?

All individuals who file a Chapter 7, 11, 12, or 13 bankruptcy must complete a credit counseling class and a debtor education training course before receiving debt relief—even if the individual’s debts are primarily business debts.

This regulation involves a husband and wife filing jointly (together) (together). Each must satisfy the condition. In contrast, business entities are exempt, including partnerships, limited liability companies, and corporations.

You might be exempt from the requirement if you must file an emergency case, or you’re in a military zone. Nevertheless, such exceptions are uncommon.

To find a course that fits the requirements of the courts in your bankruptcy jurisdiction, visit the U.S. Trustee’s website and select from a list of recognized providers.

A swift bankruptcy petition can prevent imminent creditor action. Find out how quickly you may file an emergency bankruptcy filing online.

Sometimes it is necessary to quickly halt a creditor’s action. Filing for bankruptcy is beneficial. When you file a case, the court automatically issues a stay prohibiting most creditors from pursuing collection efforts (exceptions exist).

However, filling all the bankruptcy forms is not an easy task. If time is of the essence, you can use an expedient online bankruptcy filing process known as an emergency bankruptcy filing (or skeleton file) to obtain the automatic stay and submit the remaining documentation later.

Online Filing of Emergency Bankruptcy Forms

Upon completion, the average bankruptcy petition can easily exceed fifty pages. When facing a foreclosure auction, repossession, wage garnishment, collection action, or another time-sensitive issue, however, it may not be possible to complete all of the paperwork.

You have alternative options.

When you need to file bankruptcy quickly, you can file your forms online quickly. In addition, you can access online filing 24 hours a day, seven days a week, and you can begin the online filing procedure by uploading a small fraction of the required forms:

• The petition for bankruptcy (the principal document containing identifying information, the chapter you’re filing under, and other general information)
• the names and addresses of the creditors that will be mentioned in the bankruptcy schedules (commonly referred to as a creditor mailing list or mailing matrix; verify format requirements with your court).
• a certificate indicating that you fulfilled the credit counseling requirement or a waiver request, and
• Statement Regarding Your Social Security Numbers on Form B121.

You should also be prepared to pay a filing fee, submit a request for a fee waiver, or submit a request to pay the filing charge in installments.

Finalizing a Skeleton Bankruptcy Filing

Your skeleton bankruptcy case will be dismissed if you do not provide the extra documents within 14 days. Also, be aware that certain courts may request alternative forms. The prerequisites are outlined in the local rules posted on your court’s website.

Emergency Bankruptcy Filing Procedures

For an urgent filing, you need take the following steps:

• Step 1: Contact the court clerk or visit the court’s website to determine which forms are required for an emergency filing.
• Step 2: Complete the Individual Voluntary Petition for Bankruptcy.
• Step 3: On the list of creditors, you will include the names and addresses of everyone you owe money to, along with collection agencies, sheriffs, attorneys, and anybody else attempting to collect debts from you. Use the address that appears on the most recent billing statement or court filing.
• Step 4: Complete the form Your Statement Regarding Your Social Security Numbers.
• Step 5: Complete any other paperwork required by the court (for instance, in some jurisdictions you must file a cover sheet and an order of dismissal that will be executed if you fail to submit the remaining documents).
• Step 6: Submit the originals and the requisite number of copies with your fee, a fee waiver application, or a request to pay the fee in installments, along with a self-addressed envelope, to the court clerk. Save duplicates for your records.
• Step 7: Submit the remaining forms within 14 days to prevent case dismissal.

Obtaining and Filling Out the Bankruptcy Forms

See Forms You Must File in Chapter 7 Bankruptcy for a complete list of Chapter 7 bankruptcy forms. See Completing the Bankruptcy Forms for information on each of these forms, as well as basic instructions on how to complete them.

You can increase your chances of getting paid by contacting clients who are facing collections.

When it’s time to get paid, a small business owner may face their biggest challenge yet. Fortunately, you can reduce late payments and build a business radar that alerts you when an account is on its way to collections with a little advance planning. By maintaining open lines of communication and assisting clients who are experiencing financial difficulties as they get through a difficult time, you might gain loyal clients for life.

Customers who are slow to pay typically fall into three categories:

• Customers who want to pay but are unable to do so on time due to legitimate financial difficulties.
• Customers who favor to juggle or postpone payments.
• Customers who will take any action necessary to avoid making a payment.

There is hope for the first two categories. You might be able to control these debts and persuade the debtors to pay in full or in part. Regarding the final group, you must identify it as soon as you can and take serious action, perhaps handing the account over to a collections agency (discussed below).

No matter what efforts you make to collect, the following rule is always true: As soon as you can, get to work, and continue working on the account until you are paid. Send bills promptly, and send new bills every month. There is no need to wait until the month’s end. Once an account is past due, send reminder letters as soon as possible.

More advice is offered below:

• No harassing. Don’t bother those who owe you money, but let them know you are keeping an eye on the situation. You shouldn’t call a debtor more than once per day, and you shouldn’t ever leave messages that contain threats or disparaging remarks about the debtor.
• Don’t get personal; be direct, listen, and direct. Calls should be brief and specific. According to Carol Frischer, a specialist in collections, your aim should be to stop the debtor from taking the call personally, or from equating the failure to pay as a failure in life. Always maintain your composure while maintaining a sense of urgency regarding getting paid.
• Be imaginative. Ask the customer how much they can reasonably afford to pay if they are experiencing real financial difficulties. If the client accepts a new payment schedule in writing, take into account extending the payment deadline. Make sure the customer intends to abide by the agreement by calling the day before the following scheduled payment is due.
• Write letters of demand. Send a series of escalating letters along with the phone calls. Save copies of all communications you have with the customer, and make sure to take notes during every call. If you send the case to a collections agency or take the client to court, you might need these.
• Send letters using a collection agency. A fixed fee can be paid to a collection agency to have them send out several letters on your behalf. This is distinct from giving the debt to a collection agency.
• Offer a substantial one-time discount. If a fairly large account goes unpaid for a prolonged period of time (let’s say six months), and you have doubts about ever being able to recover the debt, you might want to think about making a written offer for a time-limited, substantial discount to settle the matter. A mutual release and settlement, a formal document that discharges the debt, can be used to put an end to this.
• Send the debt to a collection company. Your last resort is to send a debt to collections. Typically, a collection agency will pay you 50% of the money it collects. Of course, there are instances where half is preferable to nothing.