Stopping repossession with bankruptcy is possible on a temporary basis because a bankruptcy court enters an automatic stay when a person files a petition for bankruptcy. An automatic stay is a court order that prevents creditors from taking any further action, including repossession, to collect on a debt. The person filing the petition for bankruptcy is a petitioner. A creditor that takes action to repossess an item of property is a secured creditor, which means the creditor is entitled to repossess a specific piece of property. An automatic stay temporarily stops repossession, which enables the petitioner to decide whether to eliminate the debt on the property or to restructure the payment obligation on the debt.
A secured creditor ordinarily may repossess a certain piece of property when a person uses the property as collateral to secure a loan. A creditor that takes action to repossess ordinarily must sell the property to satisfy the unpaid balance on a loan. If the money from the sale is not sufficient to pay off the loan, the creditor may take legal action against the borrower to satisfy the remaining balance. A person may use bankruptcy to prevent the repossession by filing a petition with the court. Moreover, if a creditor has already repossessed a piece of property, a court can enter an order that requires the creditor to return the property.
A petitioner that has stopped repossession with bankruptcy must then decide whether to keep the property. If the petitioner wants to stop repossession with bankruptcy permanently, then the petitioner must reaffirm the debt. This means the petitioner must sign a reaffirmation agreement that will obligate the petitioner to resume making payments until he or she pays off the debt. The bankruptcy court may restructure the payment obligation to decrease the monthly payment amount. Interest will continue to accumulate on the debt.
Alternately, a petitioner that stopped repossession with bankruptcy may decide it is best to eliminate the debt and allow repossession. A creditor is then able to take the property and sell it to satisfy the debt. The creditor will have no further recourse against the petitioner because the bankruptcy will eliminate any remaining balance on the debt. This will depend on whether a petitioner is seeking to eliminate debts or to reorganize debts. A Chapter 7 bankruptcy eliminates debt, and a Chapter 13 bankruptcy restructures a petitioner’s payment obligations.
A bankruptcy attorney can advise a person who has used bankruptcy to stop repossession about whether he or she should reaffirm a debt on a specific item of property. In most instances, it is not in a petitioner’s best interests to reaffirm a debt, because most property depreciates. In addition, a person can better use his or her resources to get a fresh financial start. Stopping repossession with bankruptcy, however, will give the person time to think about his or her financial situation and decide whether to keep the property or relinquish it.
