April 21, 2011
By: J. Cale Rogers
Coleman, Chambers, Rogers & Williams, LLP
This article is intended for educational purposes only and is not intended, nor should be construed to provide legal advice.
When considering filing for Chapter 7 bankruptcy, one of the first questions that a debtor has is often “Can I keep my house and car if I file?” And understandably so—an individual’s house and car are oftentimes their most substantial assets, as well as the assets that affect the day-to-day lives of most debtors. The short answer to that often-asked question is “usually”. Most creditors holding a debt that is secured by a particular piece of collateral (for example, a house or a car) will allow the relevant debtor to “reaffirm” the debt and retain possession of the relevant collateral. Essentially, reaffirming a debt will result in the relevant debt surviving the bankruptcy proceeding, so that, after the debtor receives his or her discharge in Bankruptcy Court, it is as if the bankruptcy were never filed, with respect to any reaffirmed debt.
Most secured creditors want debtors in bankruptcy to reaffirm their debt, and typically a reaffirmation agreement can be obtained with ease from a secured creditor after the filing of a bankruptcy petition. However, the one major exception to this practice is that, in a Chapter 7 filing, a debtor generally must be current on his or her payments to the secured creditor before a reaffirmation agreement will be accepted. Reaffirmation agreements are required to be filed with the clerk’s office within 60 days of the of the debtor’s 341(a) hearing.
Georgia’s exemption statute must also be examined when determining whether a reaffirmation agreement is feasible. An “exempt” asset simply means that the asset is exempt from the powers of the United States Trustee or any of the debtor’s creditors, and that the debtor may keep the asset in bankruptcy without surrendering it to the United States Trustee. Essentially, most secured debts may be reaffirmed, but in order to satisfy the trustee, the equity in the relevant collateral cannot exceed the exemptions allowed under Georgia law.
For example, each debtor in bankruptcy in Georgia is entitled to a $3,500 exemption in automobiles, as is the debtor’s spouse, if filing. The exemption applies only to the equity accumulated in the relevant asset. For example, an automobile valued at $10,000 with an outstanding loan of $8,000 to a secured creditor would qualify as exempt under Georgia’s exemption statute. It is also noteworthy that the Georgia “wildcard” exemption provides any debtor who is not claiming equity in homestead property is allotted an additional exemption of $5,600 that may be used to exempt any property, including cash equivalents or additional equity in an automobile that is not otherwise exempt under the standard $3,500 automobile exemption. So, if an individual debtor owned a car valued at $7,500 that is paid off and does not claim an equity interest in real estate, the debtor’s automobile exemption could be combined with a portion of the debtor’s wildcard exemption (assuming the wildcard exemption is not used on other non-exempt assets), and the automobile would be exempt in the bankruptcy filing.
Furthermore, each debtor in Georgia filing for bankruptcy is entitled to a $21,500 exemption in any property that is being used as the debtor's homestead. If the debtor is married, the exemption is increased to $43,000, even if the debtor's spouse is NOT filing. It is also noteworthy that the trustee will typically allow a greater, somewhat flexible exemption in real estate, as the trustee knows there are expenses associated with the sale of real property, like a commission, that would have to be paid upon the sale of the same. Like the automobile exemption, the exemption for homestead applies only to the equity in a residence. Given the flexible nature of the real estate exemption and the current state of the depressed real estate market, the Trustee will generally allow you quite a bit more equity in your home than the official exemption, which could allow you to keep your home. As long as the exemption statute is met with respect to the collateral, the debt can likely be reaffirmed.
Even those debtors that are subject to a judgment lien may claim the exemptions discussed herein. Federal law provides that a judicial lien may be avoided to the extent that such lien otherwise impairs an exemption to which the debtor would be entitled. However, in order for those debtors to retain possession of their assets in Bankruptcy Court, a motion to avoid the relevant lien must be filed with the Court. These lien avoidance issues are often complex and can result in complications for the debtor if not properly addressed. Please contact Coleman, Chambers, Rogers & Williams, LLP to speak with a bankruptcy attorney who is familiar with the procedures related to the exemption statutes and lien avoidance to keep the maximum amount of property that you are entitled to in your Chapter 7 bankruptcy filing.
There are, however, certain issues that must be examined prior to reaffirming a debt. In some instances, it is not advisable for a debtor to reaffirm a debt, in situations where the monthly payments exceed the debtor’s cash flow or where the fair market value of the relevant collateral is much less than the amount owed to the relevant creditor. In those and other circumstances, it may be more beneficial for a debtor to disaffirm the debt, to discharge it in bankruptcy, and replace the asset surrendered with one more economical.
A debtor in bankruptcy is not required to reaffirm any debt and reaffirming a debt should always be given adequate consideration by a debtor in bankruptcy, as an individual is only eligible to file for protection under Chapter 7 of the Bankruptcy Code one time every 8 years. If a debt is affirmed in bankruptcy, and the debtor receives a discharge, the debtor may find himself struggling to subsequently pay a debt that is reaffirmed after the discharge is entered, if the debtor’s income decreases in the future. Such a scenario could result in a debtor defending against a judgment subsequent to a bankruptcy discharge.
Please note that the analysis related to retaining secured collateral is much different in a Chapter 13 filing than that relevant to a Chapter 7 filing. Generally, a Chapter 13 debtor may retain the collateral that has been pledged to secure the repayment of any loan, so long as the debtor continues to pay the secured creditor. The amount of equity in the asset does not determine whether the debtor may keep the asset, though it could ultimately affect the amount of money the debtor is required to pay to all unsecured creditors under the Chapter 13 Plan. Reaffirmation agreements are not filed in a Chapter 13 case, and any secured debt can be discharged in a Chapter 13 filing by the debtor surrendering the relevant collateral to the creditor and notifying the Court in his or her filing of the intention to discharge the relevant secured debt. Under those circumstances, the secured debt would become an unsecured debt, and would be treated accordingly under the debtor’s Chapter 13 Plan. For more information about Chapter 13 filings, please see our article concerning the same.
About the author: Cale Rogers is a partner and attorney with Coleman, Chambers, Rogers & Williams, LLP, in Gainesville, Georgia. The law firm of Coleman, Chambers, Rogers & Williams, LLP regularly handles matters in Bankruptcy Court in the Northern District of Georgia. The firm can handle Chapter 7 and Chapter 13 filings for qualifying debtors in almost all North Georgia counties including: Hall County (Gainesville), Dawson County (Dawsonville), White County, Forsyth County (Cumming), Lumpkin County (Dahlonega), Union County, Habersham County (Cornelia, Clarkesville, Baldwin), Towns County (Hiawassee), Stephens County (Toccoa), Rabun County (Clayton), Banks County (Homer), Fulton County (Atlanta), Gwinnett (Lawrenceville, Buford) and Jackson County (Jefferson). Please call the bankruptcy attorneys at Coleman, Chambers, Rogers & Williams, LLP to discuss your options. Please call 678-928-5757 .
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