To Surrender, Reaffirm or Redeem in Massachusetts Bankruptcy

When filing for personal bankruptcy in Massachusetts, many debtors have assets that a creditor has a security interest in; for example, a mortgage for a home or a lien on a vehicle.  The lender has the right to foreclose on a mortgage or seek return of the vehicle if the loan is not paid in a timely fashion.

What happens in a bankruptcy?  The law says that the debtor in bankruptcy has the right to either surrender the property, reaffirm the loan, or redeem the loan.

What Does Surrender in Bankruptcy Mean?

The debtor may not be able to make the payments, or even be interested or able to restructure the payments.  In such a case the law says that the debtor can “surrender” the property back to the lender.  In a Chapter 7 personal bankruptcy, the debtor need not make any payments on secured debt.  If the debtor intends to return, or “surrender” the asset, the debtor can simply do so by so notifying the lender in the bankruptcy filing and in writing.

If the property is real estate, the debtor simply vacates and returns the keys to the lending institution.  If the property is a motor vehicle, the debtor can make arrangements to return the vehicle to a location desired by the lender, or have the lender retrieve the vehicle.    The same is true for other secured property that is to be surrendered.

How Can a Debtor Reaffirm the Loan?

Many debtors in Chapter 7 personal bankruptcy in Massachusetts want to reaffirm their loan – they want to stay in their home or keep their vehicle.  Within certain parameters this will work, however, the debtor, and the creditor, must undertake the proper procedures.  The debtor must file a “Statement of Intention” with the Bankruptcy Court.

Second, a written “reaffirmation agreement” is required to make the reaffirmation permanent, that is, to override the bankruptcy.  Nevertheless, many creditors do not insist on the written reaffirmation and many debtor attorneys advise against signing a written reaffirmation.  Sometimes the paperwork is simply “neglected” prior to the discharge, all to the debtor’s advantage.

What are the consequences of getting a discharge without a written reaffirmation?  In this “ride through” scenario the situation is quite beneficial to the debtor.  While the creditor can always foreclose on the asset, the creditor cannot collect on any deficiency and foreclosure may be more difficult as the creditor will need state court (not Bankruptcy Court) approval.

Debtors Redeeming Property in Bankruptcy

Another avenue afforded by the Bankruptcy Code is to “redeem” the subject property.  To redeem is to buy back the collateral, such as paying the lender the market value for a vehicle.  Debtors are advised to be careful in redemption because the assets used to redeem may disqualify a debtor for bankruptcy.  However, if the debt is significantly over the market value, this can be a useful tool.

Bankruptcy Planning in Protecting Assets

As every careful bankruptcy practitioner knows, pre bankruptcy planning is the key to a successful bankruptcy for the client.  Bankruptcy clients are offered a “fresh start” by the Bankruptcy laws, which are very effective laws for folks in significant debt that they cant repay.

Careful planning on what to do with important assets that have liens on them can make all the difference.  Work with your bankruptcy attorney to determine if surrender, reaffirmation or redemption is the right path for you.

Finally, if you are reaffirming a debt, work even more closely with your attorney as the creditor may not require a reaffirmation agreement prior to discharge, giving you some additional rights and avenues following bankruptcy.