Keep and Pay

Definition

Keep and Pay refers to a legal arrangement often used in bankruptcy proceedings where a debtor is allowed to retain possession of certain secured collateral (such as a car or home) as long as they continue to make the required payments on the associated loan or debt. This arrangement allows the debtor to avoid repossession or foreclosure while maintaining their financial obligations.

Key Components

  1. Secured Debt: Debt that is backed by collateral, such as a mortgage or auto loan.
  2. Bankruptcy Proceedings: Legal process through which individuals or businesses seek relief from unmanageable debt, typically under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code.
  3. Retention of Collateral: The debtor retains possession of the secured property.
  4. Continued Payments: The debtor must continue making regular payments on the secured debt to keep the collateral.

Importance

  1. Asset Retention: Allows debtors to keep essential assets, such as their home or car, which are necessary for daily living and earning a livelihood.
  2. Debt Management: Provides a structured way for debtors to manage and pay down secured debts while going through bankruptcy.
  3. Avoiding Repossession: Helps debtors avoid the negative consequences of repossession or foreclosure, such as losing their home or vehicle and damaging their credit score further.

Example Scenarios

  1. Chapter 7 Bankruptcy: An individual files for Chapter 7 bankruptcy and chooses to keep their car by continuing to make the monthly payments on the auto loan under the keep and pay arrangement.
  2. Chapter 13 Bankruptcy: A debtor files for Chapter 13 bankruptcy, which involves creating a repayment plan to pay off debts over time. The debtor can include provisions to keep their home and continue making mortgage payments.
  3. Reaffirmation Agreement: In some cases, the debtor might enter into a reaffirmation agreement with the lender, formally agreeing to keep the asset and continue paying the debt despite the bankruptcy filing.

Challenges

  1. Financial Strain: Continuing to make payments on secured debts can be challenging for debtors who are already in financial distress.
  2. Legal Requirements: Complying with legal requirements and navigating the complexities of bankruptcy law can be difficult without professional legal assistance.
  3. Risk of Default: If the debtor fails to make the required payments, they risk losing the asset to repossession or foreclosure.

Best Practices

  1. Legal Advice: Seek advice from a bankruptcy attorney to understand the implications of keep and pay arrangements and ensure compliance with legal requirements.
  2. Budgeting: Create a realistic budget to ensure that ongoing payments on secured debts can be maintained while managing other financial obligations.
  3. Timely Payments: Make all required payments on time to avoid default and the risk of losing the retained assets.

Conclusion

The keep and pay arrangement in bankruptcy proceedings allows debtors to retain possession of essential secured assets by continuing to make the required payments on the associated debts. This arrangement provides a way for debtors to manage their financial obligations while avoiding the negative consequences of repossession or foreclosure. Understanding the key components, challenges, and best practices associated with keep and pay can help debtors navigate bankruptcy more effectively and maintain their essential assets.