How to file bankruptcy, save the house

Dear Bankruptcy Adviser,
The Chapter 7 bankruptcy paperwork has four options on the Statement of Intentions form. They are: surrender, redeem, reaffirm and other. I am trying to save my home. Should I choose “other,” with an explanation of loan modification, or “redeem,” which has no explanation?
— Adam

Dear Adam,
The Statement of Intentions form is your declaration regarding your secured debts. Examples of secured debts are car loans, furniture or appliance loans, mortgages, jewelry loans, and time shares.

The mere filing of the Statement of Intentions does not create any liability. Simply stating your intention is to keep your home or other secured accounts and continue making payments does not prohibit you from changing your mind in the future.

You state that you intend to save the house and continue making payments. But let’s say you discover you cannot afford the payments after the bankruptcy case closes. You won’t find yourself liable just because you had stated you wanted to hold on to the home.

As you note in your question, the Chapter 7 form gives four options: surrender, redeem, reaffirm and other.

The only way to establish future liability after the bankruptcy is to either redeem or reaffirm the loan while the bankruptcy is active. (There is a third way to establish future liability that is not covered in the Statement of Intentions section. It deals with the assumption of a lease covered in Schedule G: Executory Contracts and Unexpired Leases.)

Surrendering means you do not want the property and wish to give it back to the lender. This could be for any secured debt. It is very important to understand that merely stating you want to surrender the item does not automatically eliminate your liability.

For example, you want to surrender your car, but you still have the car in your possession when you file your case. You must maintain your car insurance coverage until the lender has taken physical possession of the vehicle.

Redeeming under the bankruptcy code permits you to pay off a loan for the retail market value of the property in question or obtain a new loan with a lender at the retail market value of the asset.

For example, you own a car with a balance of $20,000, but the current retail value is only $12,000. Either you can pay off the car loan at $12,000, or you can find a new lender to finance the lower retail value.

However, you cannot redeem your home or a time share, only what’s considered “tangible” personal property, meaning it’s movable. So redeeming is not for you, Adam.

Reaffirming a loan requires you to sign a legally enforceable contract in which you promise to repay all or a portion of a debt that otherwise could be discharged in your bankruptcy case.

Reaffirm with great caution. I never recommend that a client reaffirm a mortgage or car loan. The only benefit I see is that loan payments made after a bankruptcy filing will count toward your credit report, and the lender may work with you if you fall behind on your monthly payments.

Some car lenders have a “reaffirm or repo” policy. If you do not reaffirm the loan while the bankruptcy is active, the lender will repossess the vehicle once the case closes.

Very important note: You must contact your mortgage lender to determine whether you must reaffirm your home loan. In most cases you do not, and you can continue to make the monthly payments. In some, you may have to reaffirm in order to keep your house.

This brings us to “other,” which can have many options. Unless you must reaffirm a loan or else, you can pretty much state whatever you wish to do with the property here.

In your case, Adam, you could indeed state you intend to work on a loan modification with the lender and retain the property. This is common when a client is behind on his payments and hopes to modify his home loan. The lender is not obligated to work with you, and you are not reestablishing any liability simply because you say you intend to modify your loan. If your modification request is unsuccessful, you are still permitted to walk away from the home without liability.

Also under other in Chapter 7, you could state you intend to keep the property and continue making payments. This means you do not want to reaffirm the loan or redeem the property but simply wish to keep up the payments to the lender. Some lenders permit this option. The laws in your state may require a lender to accept this as an option. Understand that the lender will allow you to keep the asset but won’t report post-bankruptcy payments for your credit report.

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