One of the most frequently asked questions is, "How can I keep my car or house in a Chapter 7 bankruptcy? House and car loans fall into a category of debt, known as secured debt. Secured debt simply means that if you don't make the payment, such as a house or car payment, the lender can take the house or car away from you. With a car this is referred to as repossession and with a house it is referred to as a mortgage foreclosure. If you are not current on your house or car loan when the Chapter 7 case is filed, the lender will lift the automatic stay and proceed in state court to take the house or car away from you. In the case of cars the repossession process can be very quick while in the case of your home the foreclosure proceeding takes longer.
If, however, you are current on payments you can keep the house or car by reaffirming the loan with the lender.
The bankruptcy law is very specific about what can be done with secured debt.
• You can reaffirm it, meaning that you agree to keep the house or car; make the current payment; and take the debt out of the bankruptcy discharge
• You can surrender it, meaning you give the property back to the lender and you do not own the lender any money.
• You can redeem it; meaning that you can buy the property from the lender by paying the fair market value to the lender.
Reaffirmation means that you will continue to pay the lender the agreed payments on the vehicle or home. Hence the original loan is in place. But it also means that if you fail to make the payments the lender will be able to take the house or vehicle away from you, sell it and sue you for any deficiency between the sale price and what you owe. If you are upside down with your house or car the deficiency could be very large. If the debt had not been reaffirmed you would not owe the deficiency. If you have reaffirmed the debt you will have to pay it and the bankruptcy will not protect you.
What to do?
We do not recommend reaffirmations unless there is equity in the house or car and the remaining term of the loan is short. The whole point of a Chapter 7 bankruptcy is to get a fresh start and to get out from under the crushing burden of debt. This is done by discharging the debt. If the car payment is too high and the car is upside down you should not reaffirm. Certainly you will have to find another vehicle. This takes some effort but it can be done.
With houses we cannot recommend reaffirmation on a second or third mortgage except in very unusual circumstances. If the first mortgage is current and the house is not upside down it maybe a good idea.
The drafting, execution and filing of a reaffirmation agreement is very technical and subject to strict time limits. You should not attempt to do it yourself. One of the questions you should ask any bankruptcy lawyer is whether or not the preparation and filing of reaffirmation agreements is included in their fee or is an extra charge. Be careful of anyone who quotes a low bankruptcy fee if you want to keep secured debt such as houses and / or cars. If the fee does not include reaffirmation agreements it may not be the bargain you think it is. If you have any questions by all means give us a call. Our fees include all reaffirmation agreements, redemptions and assumptions.
Reaffirmation Disclosure
Before agreeing to reaffirm a debt, review the terms disclosed in the Reaffirmation Agreement and these additional important disclosures and instructions.
Reaffirming a debt is a serious financial decision. The law requires you to tale certain steps to make sure the decision is in your best interest. If these steps, detailed in Part B below, are not completed, the reaffirmation agreement is not effective, even though you have signed it.
A. Disclosure Statement
1. What are your obligations if you reaffirm a debt? A reaffirmed debt remains your personal legal obligation. Your reaffirmed debt is not discharged in your bankruptcy case. That means that if you default on your reaffirmed debt after your bankruptcy case is over, your creditors may be able to take your property or your wages. Your obligations will be determined by the reaffirmation agreement, which may have changed the terms of the original agreement. If you are reaffirming an open end credit agreement, that agreement or applicable law may permit the creditor to change the terms of that agreement in the future under certain conditions.
2. Are you required to enter into a reaffirmation agreement by any law? No, you are not required to reaffirm a debt by any law. Only agree to reaffirm a debt if it is in your best interest. Be sure you can afford the payments that you agree to make.
3. What if your creditor has a security interest or lien? Your bankruptcy discharge does not eliminate any lien on your property. A "lien" is often referred to as a security interest, deed of trust, mortgage, or security deed. His property subject to a lien is often referred to as collateral. Even if you do not reaffirm and your personal liability on the debt is discharged, your creditor may still have the right under the lien to tale the collateral if you do not pay or default on the debt. If the collateral is personal property that is exempt or that the trustee has abandoned, you may be able to redeem the item rather than reaffirm the debt. To redeem, you make a single payment to the creditor equal to the current value of the collateral, as the parties agree or the court determines.
4. How soon do you need to enter into and file a reaffirmation agreement? If you decide to enter into a reaffirmation agreement, you must do so before you receive your discharge. After you have entered into a reaffirmation agreement and all parts of this Reaffirmation Documents packet requiring signature have been signed, either you or the creditor should file it as soon as possible. The signed agreement must be filed with the court no later than 60 days after the first date set with the creditors, so that the court will have time to schedule a hearing to approve the agreement if approval is required.
5. Can you cancel the agreement? You can rescind (cancel) your reaffirmation agreement at any time before the bankruptcy court enters your discharge or during the 60-day period that begins on the date your reaffirmation agreement is filed with the court, whichever occurs later. To rescind (cancel) your reaffirmation agreement, you must notify the creditor that your reaffirmation agreement is rescinded (or canceled). Remember that you can rescind the agreement, even f the court approves it, as long as you rescind within the time allowed.
6. When will this reaffirmation agreement be effective? If the creditor is not a Credit Union, your reaffirmation agreement becomes effective upon filing with the court unless the reaffirmation is presumed to be an undue hardship in which case the agreement becomes effective only after the court approves it. If the creditor is a Credit Union, your affirmation agreement becomes effective when it is filed with the court. If you are not represented by an attorney during the negotiation of your reaffirmation agreement, the reaffirmation agreement will not be effective unless the court approves it.
7. What if you have questions about what a creditor will do? If you have a question about reaffirming a debt or what the law requires, consult with the attorney who helped you negotiate the agreement. When the disclosure refers to what a creditor "may" do, it is not giving any creditor permission to do anything. The word "may" is used to tell you what might occur if the law permits the creditor to take the action.
Remember if you want to reaffirm make sure that you can make the payments that you are agreeing to pay.
B. Definitions
1. "Amount Reaffirmed" means the total amount of debt that you are agreeing to pay (reaffirm) by entering into this agreement. The amount of debt includes any unpaid fees and costs arising on or before the date you sign this agreement that you are agreeing to pay. Your credit agreement may obligate you to pay additional amounts that arise after the date you sign this agreement. You should consult your credit agreement to determine whether you are obligated to pay additional amounts that may arise after the date of this agreement.
2. "Annual Percentage Rate" means the interest rate on a loan expressed under the rules required by federal law. The annual percentage rate ( as opposed to the" stated interest rate") Tells you the full cost of your credit including many of the creditor's fees and charges. You will find the annual percentage rate for your original agreement on the disclosure statement that was given to you when the loan papers were signed or on the monthly statements sent to you for an open end credit account such as a credit card.
3. "Credit Union" means a financial institution as defined in 12 USC 461(b) (1) (A) (IV). It is owned and controlled by and provides financial services to its members and typically uses words like "Credit Union" or initials like "C.U." or "F.C.U." in its name.
- Disclosure Statements and Definitions are taken from Form B240A, Reaffirmation Documents in the Federal Bankruptcy Code.
