Frequently clients will tell me that they want to include certain debts in their bankruptcy petition but exclude other debts. I have to remind them that bankruptcy doesn’t really work that way. One of the fundamental principles of bankruptcy is that all of a person’s debts must be listed in his/her bankruptcy petition. However, even though all debts must be listed in the bankruptcy petition, the debts do not have to be treated the same.

When clients say that they want to exclude certain debts from their bankruptcy, they are generally thinking of the mortgage on their home or their car loan. They want to keep the house or the car and they rightly recognize that they will probably have to keep the related loan and continue making the monthly payment on those loans. Fortunately, in many cases, bankruptcy allows clients to do just that.

Bankruptcy gives individuals a very important choice to consider when it comes to their home mortgage or car loan. As I tell clients, they can either “Keep the asset and keep the debt or surrender the asset and discharge the debt.” In other words, an individual can choose to keep his car or house and, as a consequence, keep the debt secured by that asset. Keeping the debt is referred to as a “reaffirmation” in bankruptcy terminology. In such instances, the person continues to make his or her regular monthly payments on the home or car loan and they remain liable for that debt after the bankruptcy discharge.

On the other hand, an individual can choose to walk away from an asset or “surrender it” in their bankruptcy and by so doing, eliminate their liability for the related debt. If your house or car is worth less than you owe on it, some people decide to surrender their interest in the car or house and then that debt is discharged in their bankruptcy. Although they lose their interest in the asset, they are no longer liable for the secured debt on that asset.

Bankruptcy is an important step and, in order take full advantage of the fresh start, offered by a bankruptcy discharge, individuals should carefully weigh whether to continue to owe large secured debts or take the opportunity to walk away from them.