When you file for Chapter 7 bankruptcy, you will have to complete a form called the Statement of Intention (Official Bankruptcy Form 8). On this form, you tell the court, trustee, and creditors how you plan to handle your secured debts: debts that are secured by property (collateral), which the creditor can take if you don't make your payments.
Secured Debts in Bankruptcy
Bankruptcy discharges (wipes out) your personal liability for secured debts. This means that, after your bankruptcy, the creditor no longer has the right to sue you for what you owe on the debt. However, this doesn't give you the right to just keep the car, house, or other property that secured the debt; the creditor still has the right to take this property back. On the Statement of Intention form, you must indicate whether you plan to surrender the property, buy it from the creditor, or pursue other options for keeping it.
On the Statement of Intention form, you must list all of your secured debts, the creditors holding the debts, and what you plan to do with the property. You have several options for dealing with secured debt:
Surrender the property. The simplest option is just to give the property back to the creditor. If you don't really need the property, giving it back settles the issue once and for all. Your bankruptcy discharge will wipe out your personal liability for the debt, and the creditor will have its property back.
Redeem the property. To redeem the property, you buy it back from the creditor. To do this, you must pay either what you still owe on the debt or the replacement value of the property, whichever is less.
Reaffirm the debt. When you reaffirm a debt, you agree that you will still owe it -- and be legally liable to repay it -- when your bankruptcy case is over. Reaffirmation makes sense only if you really need the property, and you can reaffirm for no more than the property is worth. If you decide to reaffirm, you will have to enter into a reaffirmation agreement with the creditor and attend a hearing, where the judge will decide whether the agreement is in your best interests.
Avoid liens on the property. In some situations, you may be able to "avoid" a lien on certain types of exempt property, which wipes out the creditor's right to reclaim it. Lien avoidance is complicated; you'll want to speak to an attorney if you're planning to give this a try.
Retain the property. Some creditors will allow you to keep the property without reaffirming or redeeming, as long as you remain current on your payments. The creditor would still have the right to repossess, however.
To learn more about these options, see Your Debts in Chapter 7 Bankruptcy.
Carrying Out Your Intention
You must generally carry out his stated intention (for example, by giving back the property or paying the redemption amount to the creditor) within 30 days of the first date set for your meeting of creditors. If you miss the deadline, the automatic stay will automatically dissolve with regard to the property securing that debt, leaving the creditor free to proceed with foreclosure or repossession. However, the creditor is prohibited from taking any actions against the debtor personally.