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The BIG Bankruptcy Misconception

Thursday, 05 December 2013 08:41
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    A BIG common misconception when filing for a chapter 7 bankruptcy is that you must give up your property to pay off your debts. This misconception is false! When determining if a chapter 7 bankruptcy is right for you, it is a good idea to first consult with a bankruptcy attorney. A bankruptcy attorney can discuss your options, further examine your intentions and what will work best for you. The true fact is that you actually have options in determining which property you want to keep and the vast majority of people end up keeping everything they want.

You must first determine which property is secured and which property is subject to unexpired leases. Once you have determined which property is secured (meaning you have committed to a payment obligation and there is an item of collateral such as a car) and which property is subject to an unexpired lease (meaning the lease term has not yet ended), you can then decide your intention for that property. Will you keep it or will you give it up? The true fact is that you do not have to give up your property when filing for chapter 7 bankruptcy, there are options. The legislature has designed bankruptcy with the main purpose of allowing you (the debtor) to keep exempted property and to give you that Fresh Start once you have completely been discharged and become debt free.
    When filing for bankruptcy you must inform the court, the trustee and the secured creditor, of your intention for any secured property or unexpired lease. You must state if you plan to keep (retain) or give back (surrender) the secured property to the creditor. Or if you plan to assume (retain) or terminate any unexpired leased property. The form used in bankruptcy for informing the court, the trustee and your creditors, of your intention with respect to your property, is known as the Individual Debtor's Statement of Intentions (Official Form 8). When reviewing the form you will find that there are two parts; Part 'A,' Debts secured by the property of the estate and Part 'B,' Personal property subject to unexpired leases. Part 'A' allows you to list the creditor securing the debt, the secured property and its identifying details, along with your intention to surrender or retain the property, and whether or not the property is claimed as exempt. When intending to retain the secured property, you have options as to how you chose to proceed with the debt. Your options are to redeem, reaffirm, or take other action. This is why it is critical to consult with an attorney, to ensure that your intention is filed correctly and further action is correctly taken so that you do not lose your property. Part 'B' simply states whether you plan to terminate the lease or assume the lease (continue your obligation to make the committed payments) in order to retain that property.
    If you plan to keep any secured property your first option is to redeem the debt. Redeeming a debt is a great idea if you owe more to the creditor than the value of the property. When redeeming the property you are buying back the secured property from the creditor with a lump sum payment of the current fair market value. How the redemption works is, you must have the property valued to its current fair market value. The age and condition must be considered in determining the fair market value. Once the current fair market value is determined you must request the court to order the creditor to accept the lump sum payment in the amount of the current fair market valuation. Redeeming the debt is a great idea if the secured property is a necessity and its value is significantly less than the amount you have committed to pay. For example: You are making payments on a car for a loan amounting to $7,000.00. Taking into consideration the age, condition, and mileage your car has a current fair market value of $3,500.00. If the creditor accepts the current fair market valuation of the vehicle, the lump sum payment for the fair market value must be submitted immediately and you will be relieved of all debt. The risk of redeeming a property item is that finding the funds for the lump sum cash payment can be difficult. But after the lump sum payment has been submitted, the vehicle is yours and you are released from the debt.
    Another option when keeping your secured property is to reaffirm the debt. Reaffirming the debt is acknowledging that you plan to keep the payment obligation throughout the bankruptcy and even when the bankruptcy is over. This only applies if you have kept up on your payments. When you reaffirm the debt it is as if you never filed for bankruptcy for that property item. If you plan on keeping the collateral, reaffirming the debt can be a good idea. The risk when reaffirming your debt is that you are legally bound to pay that debt regardless of its value. For example: You have a car worth $9,000.00 and you owe $18,000.00. You opt to reaffirm the debt in a chapter 7 bankruptcy in order to keep the car. You are then legally bound to pay the $18,000.00 and must continue making the payments despite the fact the car is way oversecured.
    Finally, when retaining your secured property you have the option to take other action and explain how you plan to retain the secured property to avoid the lien. This may occur if you have a judgment lien from a lawsuit. You can avoid the lien if the property is exempt under bankruptcy laws. Consulting with an attorney is the most effective way to ensure that you do not lose your property. There are plenty of circulating bankruptcy misconceptions. Bankruptcy can be quite complex, so it is always best to seek legal advice.
    Here at the Law Offices of Gloria D. Cordova we offer bankruptcy services. Give us a call to set up a free consultation to determine which bankruptcy filing is right for you. Check in regularly to learn more bankruptcy facts that may be helpful in helping you decide if you are ready to file. Additionally, "Like" us on Facebook at https://www.facebook.com/gcordovalaw?ref=hl.


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