“Keep and Pay” refers to a type of bankruptcy strategy that a person can still keep certain assets after filing for bankruptcy, as long as he/she continues to pay for the assets. The rules of keep and pay vary in different states.
Keep and pay is a bankruptcy strategy that allows a person to keep certain assets after filing for bankruptcy, as long as he/she continues to make the payments.
Depending on the existing state or federal laws, people filing for bankruptcy can retain certain properties, known as exemptions, and the rest of their properties – the non-exempts, will be liquidated to pay their creditors.
Individuals can file a keep-and-pay statement with payment plans to the bankruptcy court to express their intentions to keep certain assets.
Understanding Keep and Pay
An individual can file for bankruptcy when he/she is not able to repay their outstanding debts. The legal proceeding will relieve the individual from their dischargeable debts, but there is still an opportunity for creditors to recover some of their loan value. The assets will be evaluated and liquidated to repay the creditors.
Typically, individuals with limited assets can file for Chapter 7 bankruptcy in the U.S. It allows the individual filing for bankruptcy to retain certain types of assets, such as personal items and clothes, household furniture, essential work tools, and certain farm properties. Such assets are known as exempt assets.
In contrast to exempt assets, non-exempt assets must be liquidated to repay creditors. Stocks and bonds, collections with high values, and second homes are some of the examples of non-exempt assets.
If an individual would like to keep certain assets, they can file keep-and-pay statements to show their intention. They usually need to provide plans about paying for the assets in the future. Such assets will also be considered exemptions that can be retained in bankruptcy, and the court will liquidate all the other non-exempts to pay creditors.
For example, an individual filed Chapter 7 bankruptcy while owing $50,000 in his second apartment. As a non-exempt, the apartment should be liquidated to pay back his creditors. However, if the individual would like to retain this apartment, he can file a keep-and-pay statement to the bankruptcy court to express his intention. As long as he can meet the scheduled repayments for the $50,000 outstanding debt going forward, he will be able to keep this apartment.
Rules of Keep and Pay
The rules of keep and pay – and other bankruptcy exemptions – vary between different states. Some states, such as California, implement both the state rules and federal rules. Typically, individuals filing for bankruptcy need to comply with the rules set by the states that they live in.
The bankruptcy rules usually set limits for the category and value of exemptions. The federal law allows exemptions that sum up to $13,400 in household furniture and personal items, such as clothes and books. Additionally, there is also a limit of $625 for each item.
Thus, in the example above, if the individual filing for bankruptcy is subject to the federal rules, his second apartment is neither within the exemption category nor within the value limit. The property is not automatically exempt from bankruptcy liquidation, so the keep-and-pay strategy needs to be adopted for the individual to keep it.
Benefits of Keep and Pay
Through keep and pay, people filing for bankruptcy can prevent certain assets from liquidation. Besides the debtors, the strategy also benefits creditors. If creditors think that they will still be able to receive repayments from their bankrupt debtors, they are usually open to keep and pay.
One of the reasons is that it takes time and effort to evaluate and liquidate the assets. Also, this type of illiquid asset, and under time constraints can only be sold at a discount.
In the same example above, if the bankrupted person does not file a keep-and-pay statement for his apartment, the bank will need to resell this apartment for repayments. Since the apartment is an illiquid asset, it costs time and money for the bank to sell it.
The selling price might be even lower than the $50,000 amount outstanding. Thus, it can be favorable to creditors if debtors take the keep-and-pay strategy and continue to make the payments.