What is 'Keep And Pay'

Keep and pay refers to type of bankruptcy exemption. It lets a person keep an asset such as a house or car, provided that the individual continues to make payments.

BREAKING DOWN 'Keep And Pay'

Keep and pay is a bankruptcy strategy in which an individual who wants to keep an asset following a bankruptcy resolution agrees to follow a payment schedule and sets forth their intentions in court documents.

All exemptions in bankruptcy refer to assets the filer gets to retain. All other property that is nonexempt can be liquidated by the court to help pay debts.

Keep and pay prevents people from having a particular asset repossessed and possibly liquidated, but it sometimes requires them to file an official statement with the bankruptcy court that shows they have a plan to pay for the asset going forward. Sometimes, this plan must also get the OK of creditors.

Generally, creditors are open to keep and pay plans if it means they think they stand a chance of actually getting paid. It often eliminates hassles on their part.

For example, say a person files bankruptcy and owes a substantial amount on a home. The bank could sell this illiquid asset, but it will take time and considerable effort, and thus, added cost.  It’s sometimes better for the bank to take the chance of getting repaid under a keep and pay plan.

For each asset in a Chapter 7 bankruptcy, for example, the filer typically is asked what they want to do with each valuable piece of property, including whether they wish to surrender it, retain and redeem it, keep it and pay what is owed in time, or do something else with it. For this reason, the person filing can request to keep and pay on particular items. The court won’t always do what the person claiming bankruptcy wants. However, many courts try to follow the filer’s wishes if they are made in good faith. Others have guidelines on what to do with assets based on its value and the amount owed.

Keep and pay sometimes helps protect assets that are illiquid, and cannot easily be sold to cover a person’s debts, or assets such as a car that are necessary for a person to get to and from work.

Keep and Pay Rules

Rules regarding keep-and-pay and various bankruptcy exemptions vary by state. Most filers must use the rules set forth by the state in which they live. However, a few states such as California have two sets of exemption rules, one under state law and the other a federal list of rules. Bankruptcy filers need to choose one set of rules or the other and use them consistently throughout the bankruptcy process.

For property, for instance, many states set an exemption value. You can keep and pay if the property value is worth less than a threshold set by the exemption rules. Say the state has a home exemption rule of up to $175,000. If the person filing bankruptcy owes only $140,000, the person filing bankruptcy can keep and pay.

RELATED TERMS
  1. Voluntary Bankruptcy

    Voluntary bankruptcy is a type of bankruptcy where an insolvent ...
  2. IRS Publication 908

    IRS Publication 908 explains the basic federal income tax aspects ...
  3. Bankruptcy Financing

    Bankruptcy financing is financing arranged by a company while ...
  4. Prepackaged Bankruptcy

    A prepackaged bankruptcy is a plan for financial reorganization ...
  5. Chapter 13

    Chapter 13 is a U.S. bankruptcy proceeding in which a debtor ...
  6. Involuntary Bankruptcy

    An involuntary bankruptcy is a legal proceeding where creditors ...
Related Articles
  1. Taxes

    Changing The Face Of Bankruptcy

    A 2005 law attempts to unmask fraudulent debtors and still save those who are struggling. Will it affect you?
  2. Small Business

    How Investors Can Profit From Bankrupt Companies

    Learn how a bankrupt company can provide great opportunities for savvy investors to find the best undervalued investment opportunities to profit from.
  3. Taxes

    How to Hire a Bankruptcy Lawyer

    How do you find the right bankruptcy lawyer? What you should look for to determine the right attorney for you.
  4. Personal Finance

    Life After Bankruptcy

    Find out what you have to look forward to after filing for Chapter 7 or 13.
  5. Taxes

    How To Survive Bankruptcy

    Bankruptcy is not the end of the world. You can survive it and come out on the other side more financially solid.
  6. Insurance

    Personal Bankruptcies Cut Almost in Half After Obamacare

    Access to health insurance many have saved many Americans from going broke.
  7. Personal Finance

    Millionaires With The Most Bankruptcies

    These celebrities made a lot and lost a lot - sometimes several times over. Find out who they are.
  8. Small Business

    7 Bankrupt Companies That Came Back

    Bankruptcy is often the end of a company – until it isn't.
  9. Taxes

    7 Decisions That Lead To Bankruptcy In The UK

    In the past three years, personal bankruptcies have been on the rise throughout the U.K. Here's how it happens.
RELATED FAQS
  1. What effect did the Bankruptcy Abuse Prevention and Consumer Protection Act of 2 ...

    Credit card companies and banks hate deadbeats who take from their bottom lines. They especially dislike the Chapter 7 bankruptcy ... Read Answer >>
  2. How does chapter 11 bankruptcy affect a company's stocks and bonds?

    Learn more about what happens to companies that file for chapter 11 bankruptcy protection - and how it differs from other ... Read Answer >>
Trading Center