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Keep and Pay

Keep and pay refers to a type of bankruptcy exemption which makes it possible for people to keep their property, on condition that they continue to make payments. In other words, keep and pay allows the filer to keep his/her assets if he/she continues to make payments for it in a timely manner. 

Understanding keep and pay

Keep and pay is a type of bankruptcy strategy in which an individual who needs to keep an asset after filing for bankruptcy agrees to follow a payment schedule, and files the needed documents to make their intention clear to the court.

All the assets (except for the ones the filer gets to retain) that are valuable and rateable can be liquidated by the court in order to help settle one's debts.

Using keep and pay strategy prohibits individuals from having their property repossessed and sometimes charged off. However, occasionally it requires people to file an official statement with the bankruptcy court in order to prove that they will be able to pay for the asset in the future. In most cases, this plan must be approved by the affected lender.

Keep and pay guidelines 

Usually creditors don't mind if their client uses a keep and pay strategy, especially if the client is much more likely to pay off the entirety of their debt.. It’s often more profitable for them, compared to the compensation order. Moreover, this process is a lot easier for the creditors.

As an example, imagine that a person filing for bankruptcy owes a considerable amount on a two-storey house. The bank has the right to ultimately sell the property to compensate for the remaining amount of money owed on the mortgage. However, this usually takes extra time and effort, and therefore, it has a higher cost. 

For instance, for every asset in a Chapter 7 bankruptcy, the individual who filed for bankruptcy is asked about how they want to use and what they want to do with each highly-valued asset, and if they want to surrender, retain or redeem it. The filer is also asked whether they want to keep this asset or pay for it.

The filer, in turn, can ask to keep and pay for particular items. Numerous courts try to follow the filer’s requests under the bona fide promise from the person filing for bankruptcy. Some of the courts, however, came up with guidelines on what filers should do with their assets, based on their value, type and the remaining amount of money owed by filers.

Guidelines could also be used if the asset is illiquid and its cost is not going to cover filer’s debts. Moreover, guidelines are used to determine if the asset affects an individual’s income. For example, a person might be in need of a car in order to be able to get to and from work.

Rules of keep and pay strategy

The most important thing you need to do in order to use a keep and pay strategy is to file for bankruptcy. When doing so, keep in mind that bankruptcy can’t clear all your debts. There are certain debts, such as child support and alimony that can’t be erased by bankruptcy. 

Since the rules regarding keep and pay may be different from state to state, bankruptcy filers have to follow the rules set by their state of residence. In case if they don't live in a state they are originally from, they must establish residency in another state first.

Individuals filing for bankruptcy can choose a set of rules that they are going to use throughout the bankruptcy process.

Some states set an exemption value for property. In case if a threshold set by the exemption rules is worth more than the value of your property, you can keep and pay.

For example, an individual filing for bankruptcy has a house worth $180,000 with an outstanding mortgage balance of $165,000 and $30,000 in equity. In this case, the state they live in allows an exemption amount up to $190,000. Since this amount exceeds the house value, the bankruptcy filer would be able to keep the house.

Example of keep and pay

Emily has recently been fired from her job and now she can’t make mortgage payments in time. Her insurer refused to renegotiate the loan payment terms. As the time went by, Emily got into more and more debts, and entered bankruptcy. 

Soon after Emily filed for bankruptcy, she was able to find a job, so her income was enough to make timely mortgage payments. However, in this case after making the mortgage payments, Emily would have less money left to sustain her previous lifestyle. Since now she would need to be much more careful with how she spends her money, she submits a plan to bankruptcy court with all the details about her expenses. After the court approves this plan, Emily gets to keep her house.

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