Protecting items post-bankruptcy

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Dear Bankruptcy Adviser,
My parents just filed for bankruptcy. They fell for a sales pitch on an overpriced water system for the home. This bill was included in the bankruptcy. I wanted to see if the company had any rights to go in and pick up the equipment. What rights do my parents have in this kind of situation?
— Aide

Dear Aide,
I am sorry you have to deal with your parents’ problems. It is always overwhelming when you have your own issues in life and must now help others.

First, you must find out whether your parents must keep this water system. If they must have the water system for health reasons, then they might have to work out a deal with the lender once the case is under way.

The reason for a post-filing deal is that the lender likely has a security interest in the system. This means the borrower, your parents, agree to pay for the system based on the contract’s terms and conditions. The lender, in this case the water-system company, maintains legal ownership over the system until the balance is paid. This is just like a car or furniture loan. If your parents don’t pay, then the system goes away.

But does the lender want the water system back? Not very likely. The system might not have any resale value. So if your parents are willing to give the product back rather than pay for it, then the lender might be very willing to give them a great deal to keep it. Negotiating a new deal after filing bankruptcy might be an excellent opportunity for your parents to get the system at its fair market value.

Creating a deal after filing bankruptcy requires a “reaffirmation agreement.” A reaffirmation agreement refers to an agreement between you, the debtor, and the lender, who’s the creditor, in the bankruptcy proceeding. When you reaffirm debt that would otherwise be discharged, or eliminated, in your bankruptcy, it means you are waiving your right to discharge that particular debt and as such agree to pay that particular debt after your case is over.

Bankruptcy might be the best opportunity for your parents to get the deal they want and a payment they can afford because the lender likely can’t do much with a used water system.

Everyone wins in this case!

Read more Bankruptcy Adviser columns and more stories about debt management.

Justin Harelik writes The Bankruptcy Adviser for He is an attorney with Price Law Group in Los Angeles. To ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “bankruptcy” as the topic.