What Is the Keep and Pay System?

Keep and pay is a form of bankruptcy exemption that allows you to keep your property. It allows a person to maintain an item such as a home or a vehicle, as long as the individual continues to make payments on the item.

Key Points Briefly

  • Keep and Pay is a bankruptcy technique where the individual maintains the ownership of asset after filing of bankruptcy. The individual also agrees to a payment schedule and state their intentions in the courts.

  • All of the exemptions in bankruptcy apply to assets that the filer is allowed to keep. All other nonexempt property may be liquidated by the court in order to assist the filer in paying off his or her existing obligations, if any.

  • While the keep and pay option protects individuals from having a specific item seized and perhaps liquidated, it can sometimes require them to make an official statement with the bankruptcy court demonstrating that they have a plan in place to pay for the item in the future. Typically, this strategy must also be approved by the creditor who has been adversely impacted.

Keep and Pay -Understand with an Example

After losing the job suddenly, Kate is struggling to pay the mortgage payments on schedule. The bank, who is the mortgage lender has the legal right to proceed to take possession of her house, unless payments are met on time with foreclosure. She declares bankruptcy to meet other expenses and continue making her repayments.

Kate immediately looks at new job postings and finds a new job for herself, that would give her enough money to repay the mortgage payments and also meet her own bills. There will be a dramatic change in lifestyle, and she would have to cut down her travel, shopping and maintain a basic lifestyle until her dues are cleared.

She declares bankruptcy in court and also lists her plan to cover her new bills and payments. She also provides source of her new job, which will help her to repay these bills. This keep and pay plan for her house needs to be approved and sanctioned by the appropriate authority, or a local court. This method now gives her the opportunity to keep her home and repay the loan.

What Rules to Follow in Keep and Pay?

The rules surrounding retain and pay, as well as the numerous bankruptcy exemptions, differ vastly from state to state. Many times, the respondents are required to follow the regulations established by the state in which they reside. However, this law can be different from the place where you are filing it and would be solely dependent on the prevailing laws of that state and bankruptcy process.

Many states, for example, have established an exemption value for real estate. If the value of your property is less than a certain level defined by the exemption laws, you may retain it and pay the tax.

If a person files for bankruptcy and owns a house worth $165,000, with a $150,000 mortgage remaining and $25,000 in equity, their state of residency permits them to claim an exemption amount of up to $180,000, which is more than the value of the property they are purchasing.