Keep and pay offers mutual benefits to creditor and debtor

An overview of keep and pay

What is keep and pay?

Keep and pay is a bankruptcy exemption where a debtor can retain assets such as houses, structures or cars as long as there is continuous payment.

Bankruptcy to keep and pay

When entities go bankrupt, there will be legal proceedings as they can no longer pay their outstanding debts. The debtor initiates the bankruptcy petition. Later, there will be an assessment of assets to pay off some of the outstanding debts.

However, in a keep and pay agreement, there is an exemption. This is a strategy used by debtors to retain assets even after declaring or filing for bankruptcy. However, debtors must follow a set of bankruptcy resolutions where they have agreed to pay on time and disclose their intentions in the form of court documents. Custody and payment rules are different from state to state.

Exempt assets vs. non-exempt assets

After a debtor files for bankruptcy, there are several assets they can keep if they meet scheduled payments and specific rules. We call these exempt assets.

On the other hand, we call assets liquidated and taken over to repay outstanding debt, non-exempt assets. If a debtor wishes to avoid this, he can keep and pay. However, there are instances when it is necessary to go to the bankruptcy court to file a formal statement on one’s asset plans and then get approval from the creditor.

It is written in Chapter 7 Bankruptcy that a person filing for bankruptcy discloses what the plans are for each asset. An individual can choose to assign, retain and redeem, or retain and pay for the specific items. If the individual wishes to retain certain assets, there is no assurance, but many courts allow the debtor to retain the assets if the purpose is reasonable, while some courts have guidelines.

The guidelines depend on the type of asset, the value of the asset and the amount of debt outstanding. After evaluating these, guidelines help identify what to do next with the assets. They can indicate whether an asset is liquid or not, i.e. whether the bank or the creditor can sell it immediately. They can also indicate whether the the asset is essential for the debtor’s source of income, such as a car to and from a workplace.

It can be less complicated to do a dungeon and pay.

There are generally two options for creditors in their next action after a debtor declares bankruptcy:

  • Keep and Pay Option. A creditor may let a debtor enter into a hold and pay agreement provided that they are satisfied that the debtor will be able to pay the full amount in the future. This can be mutually beneficial for both parties and can also be less complicated than the next option.
  • Liquidation and repossession. After the liquidation, the bank will have to resell assets to repay part of the remaining debt. Let’s say the debtor still has a huge outstanding balance to pay a mortgage; the bank will try to sell this house. Of course, before selling that house, there would be many processes, efforts, and costs, which would make the keep-and-pay option more advantageous.