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Repossession vs. charge-off in bankruptcy

When you take out a mortgage or car loan, you agree to repay the amount over time. If financial challenges become so steep that you end up having to file for Chapter 7 bankruptcy, the lender will usually do one of two things: take back the asset or charge off the debt.

How is repossession done?

Repossession is the act of taking back the property used to secure the loan. With a house, this usually involves a foreclosure action while cars and other movable forms of collateral are removed and sold so the proceeds can be applied to your debt.

New York law allows you to reclaim the seized property, provided that you reinstate the loan within a certain period of time. This means that you pay the outstanding arrears, including any costs incurred by the lender during the repossession. If you are filing for Chapter 13 bankruptcy, then loan reinstatement can be done through your Chapter 13 repayment plan, while in a Chapter 7, you have the option of reaffirming the debt.

What is a charge-off?

If they can’t collect from you, then your lender may choose to write off the debt. Charge-offs are common with unsecured debt, like credit cards, unpaid utility bills, and medical debt. In the case of credit cards, the Federal Reserve requires them to charge off any balances that are 180 days late and car loans that are 120 days overdue.

This doesn’t mean that you no longer owe it: the creditor could still sell or assign the account to a collection agency and pursue you in court themselves. Whatever the outcome, the charge-off will appear in your credit report.

If you file for Chapter 7 in New York, then these unsecured debts are usually discharged unless you voluntarily affirm them and arrange to pay them off. Chapter 13 requires you to pay them off over a three-to-five-year period.

Is one worse than the other?

While repossession appears to be the more alarming outcome because you lose both the car/home and all the payments you made prior to defaulting, charge-offs are also problematic because you still owe the debt, and your creditor or a collection agency can come after you until the bankruptcy automatic stay takes effect.

Contact a New York bankruptcy attorney

When you are struggling financially, and your creditors are preparing to repossess your assets or charge off debts and send them to collections, a New York bankruptcy attorney will help you make the best decision for your situation. Depending on how your household income and how much you owe, Chapter 7 may make more sense for you than Chapter 13, and vice-versa. An attorney will explain the pros and cons of each option and recommend a solution that makes the most sense. Jayson Lutzky is a bankruptcy lawyer with an office in the Bronx, New York. He is admitted to the Bankruptcy Court for the Southern District of Ne w York and the Eastern District of New York. Mr. Lutzky offers free in-office initial consultations. You may reach his office at 718-329-9500.

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