Reaffirmation Agreements in Chapter 7 Bankruptcy

Reaffirmation Agreements in Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy your goal is to discharge, or erase, outstanding debts that have become burdensome due to job loss, serious illness, or other financial setbacks. But life continues after bankruptcy, and you may want to keep your car, since you need transportation, and your house even though you are upside-down on your mortgage.

Understanding Capacity: How it Affects Consent and Drafting An Estate

Under current Chapter 7 laws, you can enter a reaffirmation agreement, where you agree to continue or resume making payments. The debt will not be discharged--wiped out--as part of your bankruptcy. The reasons you may agree to do this is so you can keep the asset and perhaps lessen the negative impact a bankruptcy can have on your credit history.

Here, we outline the general requirements for getting a valid reaffirmation agreement approved by the court, and then we review the specifics for auto loan and mortgage reaffirmations. Though an agreement can be arranged for any secured debt, reaffirmation agreements frequently deal with auto loans and mortgages, two of the most common forms of secured loans.

General Requirements -In general, reaffirmation agreements are:

1. Completely voluntary. You are not required to make such an agreement with any creditor;

2. Only apply to secured debts. The debt in question has to be backed by some form of collateral; e.g., your car is collateral for your auto loan, and your house is collateral for your mortgage;

3. Signed by the debtor and creditor. A properly executed reaffirmation agreement has to be signed, both, by the debtor and the creditor; and

4. Cancellable at any time before discharge or within 60 days after the agreement is filed with the court, whichever occurs later.

What Are the Risk of Reaffirming a Car Loan ? After your bankruptcy discharge is entered, your non-exempt debt will be discharged. But what happens if you still are not able to pay that car payment you reaffirmed? Your creditor can, and most likely will, repossess it and sell it at auction for a fraction of its value. Then your creditor will turn to you to pay for the deficiency, which is the difference between what the car sold for and what you owe on the loan.

Had you not reaffirmed the car loan and had the debt discharged as part of the bankruptcy, you would not be liable in any way for the amount of the loan that you owed on that car.

Understanding Capacity: How it Affects Consent and Drafting An Estate

What Is the Alternative to Reaffirmation That Car Loan? Redemption. As an alternative to reaffirming your auto loan or relinquishing the car to your creditor you can redeem the loan. To redeem the loan, you pay the creditor a lump sum to buy the car. The amount you pay is based on fair market replacement value, considering the age and condition of the car at the time you redeem it. The replacement value often can be less than what you owe on the debt. After you redeem property, you own it free and clear. And if you and the creditor can't reach an agreement on the value of the vehicle, then the court can determine the value for you.

Should I Reaffirm My Home Mortgage? Agreements to reaffirm a mortgage loan are less common. In fact the bankruptcy code does not require the court to approve a reaffirmation agreement pertaining to a mortgage secured by real estate. Two reasons why debtors usually choose to voluntarily reaffirm their home mortgage. First, the creditor will agree to start sending monthly mortgage statements to the debtor. Second, the creditor will agree to report debtor's payment of the home mortgage after the discharge to the credit reporting agencies.

What Are the Risks of Reaffirming a Home Mortgage? As with auto loans, after your bankruptcy discharge you may find that you cannot handle the monthly payment obligations of the mortgage and default on the reaffirmed mortgage. The creditor will pursue foreclosure against you, and you will be in the same bad position you were in before filing for bankruptcy. Keep in mind you can achieve the same results without a reaffirmation agreement in this case as long as you keep making your monthly mortgage payments post discharge and report your payments to the credit reporting agencies yourself.

There are many issues to consider before choosing to reaffirm certain secured debts. You should carefully evaluate the associated risks in keeping that car, motorhome, RV, ATV, etc... post discharge if it is subject to a loan. Consult with an experienced bankruptcy attorney. The lawyers are Farhat Law Firm, APC in Corona, California, are trained and prepared to explain your options and the potential risks of reaffirming certain debts.