When filing for bankruptcy under Chapter 7, protection of certain assets requires more than just listing them under the applicable exemptions. For example, a homestead may be subject to a mortgage or a vehicle may serve as collateral for the repayment of a loan. In these situations, the debtor must file a Statement of Intention within 30 days after filing the Petition, or before the First Meeting of the Creditors, whichever is first. If the debtor is represented by an attorney, the attorney will typically file this form along with the Petition. On the Statement of Intention, the debtor must choose one of four options with regard to the asset. Surrender, redeem, reaffirm, or ride-through.
If the debtor is unable to make on-going payments toward repayment of the loan, he or she might have to surrender the asset. This means that the creditor may decide to repossess the asset. The good news, however, is that the repossession will wipe out the claim up to the value of the property, and the bankruptcy discharge will wipe out any outstanding balance.
If the debtor is able to come up with enough cash to “buy” the asset, he or she may pay the creditor the value of the asset, which will wipe out that amount of the claim (the secured amount). Any remaining balance on the claim will be unsecured and will be discharged. However, this is often difficult to accomplish because the redemption must be made in a one-time payment, rather than by installments.
If the debtor has equity in the asset, or will soon gain equity, it might be wise to reaffirm. This involves a written agreement with the creditor that also must be filed with the court. Under the agreement, the debtor becomes re-obligated to the debt, which removes the debt from the bankruptcy case. The upside is that the creditor must then report timely payments to the debtor’s credit report, which re-builds the debtor’s credit score. The downside is that if the debtor later defaults and the creditor repossesses the property, the debtor will still be obligated on the remaining balance.
Finally, the debtor may choose to ride-through. Here the debtor will continue to make regular payments as with reaffirmation, but there is no written agreement re-obligating the debtor to the debt. This means two things: First, the creditor is not required to report to the credit report. Second, if the debtor later loses the property, the remaining debt falls back into the bankruptcy case and is discharged. It also should be noted that some lenders do not allow ride-through.
The assets that are subject to the Statement of Intention requirement are often highly important to the debtor, if not necessary to his or her post-bankruptcy financial growth. Deciding which option to choose takes thorough planning and prioritizing, as well as knowledge of the law.