Statement of intention chapter 7

Statement of intention for chapter 7

Every Chapter 7 liquidation bankruptcy has a statement of intention that must be filled out.  The statement of intent applies only to secured debts.  For example a mortgage, a car payment, or even furniture purchased on store credit.  The basic premise of any secured debt is that if a debtor wants to keep the asset he or she must continue to pay for it; otherwise the collateral (home, car, or furniture) must be surrendered.

The terminology under the bankruptcy code can seem very religious at times and often hard to understand.  For example, suppose you purchased a Kia Soul from Satan Motors and then filed for bankruptcy.  You essentially have three choices in regards to your Soul.  You can: (1) Surrender your Soul to Satan Motors, (2) Reaffirm your Soul with Satan Motors, or (3) Redeem your Soul.  All jokes aside, these three terms: (1) Surrender; (2) Reaffirm; and (3) Redeem are the main choices on any statement of intent.   So let’s dive in and go through what all three terms actually mean in regards to your bankruptcy.

Surrender is the simplest to understand.  Upon completion of your bankruptcy you intend to return the collateral that you no longer want or can no longer afford.  The secured lender will make arrangements to pick up the vehicle or furniture.  In the case of real estate, the lender will proceed with foreclosure proceedings under California law.  However, under no circumstances will you be liable for any kind of deficiency post bankruptcy on any items that you surrendered.

Reaffirmation or as they are otherwise known as reaffirmation agreements allow the debtor to make a new contract with the secured lender.  By signing the reaffirmation agreement the debtor agrees to continue to pay the secured lender at the agreed terms and the lender promises not to take the collateral post bankruptcy.  The upside to the debtor is that this new debt will help rebuild his or her credit post bankruptcy and sometimes allow for the negotiation of even interest or even principal reduction.  The downside is that the debtor has a new debt post bankruptcy and in the event of a post bankruptcy default is still liable for the debt regardless of the bankruptcy.  And in the case of vehicle repossession the debtor would be liable for any deficiency if the lender sells the vehicle at auction for less than what is owed on the note.

Redemption allows the debtor to buy the collateral in question for fair market value and own the collateral free and clear.  Redemption can only be applied consumer debts for personal and household use.  Real estate and business items cannot be redeemed.  Redemption is effective when you owe substantially more than your collateral is worth.  However, the biggest down side of redemption is the lump sum requirement.  Despite the large savings that are possible with redemption, few debtors have the necessary cash to buy their collateral at fair market value.  But those who are fortunate enough to have it or are able to borrow it from a friend or family member the reward is well worth it.  Recently, commercial banks, granted at high interest rates have also gotten into the redemption business.  For example at a commercial bank will provide the funds necessary to pay for redemption but will now be in the new secured lender post bankruptcy.  Even with their high rates, the reduction in the principal balance might still be worth it.

Regardless of what choice you make on the statement of intent it always recommended to sit down with a competent bankruptcy attorney and to weigh the pros and cons of how to handle each secured debt you may have, because the simple choice of surrender, reaffirm, and redeem can have long lasting consequence well beyond the bankruptcy case.

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