Filing for bankruptcy can be a stressful and overwhelming process for anyone. One of the biggest concerns for individuals who have taken out a collateral loan is how their bankruptcy filing will affect their collateral. A collateral loan is a loan that is secured by an asset or property, such as a car or a house. In this article, we will explore what happens if you file bankruptcy with a collateral loan.
First, it's important to understand the two types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is also known as liquidation bankruptcy because it involves the liquidation of a debtor's non-exempt assets to pay off creditors. Chapter 13 bankruptcy, on the other hand, is a reorganization bankruptcy that allows individuals to keep their assets while they pay off their debts over a period of three to five years.
If you file for Chapter 7 bankruptcy, the bankruptcy trustee will take possession of any non-exempt assets, including your collateral, and sell them to pay off your creditors. Your collateral will be treated like any other asset, and if the trustee sells it, the proceeds will be used to pay off your debt. If the proceeds from the sale of your collateral are not enough to pay off the debt, the remaining balance will be discharged, and you will no longer owe anything on that debt.
However, if you want to keep your collateral, you have a few options. You can either reaffirm the debt or redeem the collateral. Reaffirming the debt means that you agree to continue making payments on the loan, even after your bankruptcy discharge. This is often done with car loans, where the debtor agrees to continue making payments on the car loan while keeping the car. If you reaffirm the debt, you will still owe the full amount of the loan, and if you fail to make payments, the creditor can repossess the collateral.
Redeeming the collateral means that you pay the creditor the fair market value of the collateral, and the creditor releases the lien on the collateral. This is often done with cars, where the debtor pays the creditor the current value of the car, and the creditor releases the lien, allowing the debtor to keep the car. Redemption can be a good option if the fair market value of the collateral is less than the amount owed on the loan.
If you file for Chapter 13 bankruptcy, you have more options when it comes to your collateral. In Chapter 13 bankruptcy, you can keep your collateral as long as you continue to make payments on the loan. Your collateral will be included in your Chapter 13 repayment plan, and you will continue to make payments to the creditor outside of the plan. If you fail to make payments on the loan, the creditor can still repossess the collateral.
If you want to keep your collateral but are struggling to make payments, you may be able to lower your payments through a process called cramdown. Cramdown allows you to reduce the amount you owe on the loan to the current fair market value of the collateral. For example, if you owe $10,000 on a car loan, but the car is only worth $7,000, you can cram down the loan to $7,000, which will lower your monthly payments.
There are some limitations to cramdown, however. You can only cram down loans for certain types of collateral, such as cars and other personal property, and only if the loan was taken out more than 910 days before you file for bankruptcy. Additionally, you cannot cramdown loans for your primary residence.
Filing for bankruptcy with a collateral loan can be a complex process, but there are options available to help you keep your collateral. If you file for Chapter 7 bankruptcy, the trustee will sell your collateral to pay off your debt, but you can reaffirm the debt or redeem the collateral to keep it. If you file for Chapter 13 bankruptcy, you can keep your collateral as long as you continue to make payments on the loan, and you may be able to lower your payments through cramdown. It's important to work with an experienced bankruptcy attorney to understand your options and make the best decision for your financial situation.