Those of you filing chapter 7 bankruptcy will face the decision of whether you should reaffirm your secured debts, which are typically just your home mortgage and car note. Your attorney knows full well that you need a car to get to and from work, and dont want to move. So therefore we want you to sign that reaffirmation agreement on those items, right? Maybe, but probably not.
Some of the most common questions I get in a bankruptcy consultation are:
- Will I lose my house in chapter 7 bankruptcy?
- Can I keep my car in chapter 7 bankruptcy?
- What kind of car loan interest rate can I expect after chapter 7 bankruptcy?
- How will I get a mortgage after chapter 7 bankruptcy?
- How long after my bankruptcy case can you buy a house?
As many chapter 7 debtors rightfully worry about their ability to qualify for a home mortgage or car note after their chapter 7 bankruptcy discharge, they often think If I dont sign that reaffirmation agreement then I will lose my house and my car. Fortunately, thats not necessarily the case.
Reaffirmation means that, in return for the right to keep property or to receive credit in the future, you agree to reobligate yourself to pay a debt you would not otherwise be required to pay after bankruptcy. However, if you owe more on the debts than the property that secures the debt is worth, you may not want to agree to reaffirm for the full amount of the debt, because you could go out and buy the same merchandise, house, or car for less money. Think about it- why would you want to come out of bankruptcy with a car that is worth $10,000, but you owe $25,000?
Some secured lenders (particularly home mortgage lenders) will continue to accept your monthly payments and allow you to keep the collateral even if you havent indicated intent to reaffirm your debt. This is known as the Retain and Pay option, which is an informal option not explicitly recognized by the Bankruptcy Code, but not specifically forbidden by it either. The risk with this option is a lack of certainty or predictability. Some car lenders will repossess vehicles unless you timely reaffirm the debt, depending on your states law and whether there is an ipso facto clause. Some lenders feel that it is better to receive monthly payments under the informal retain and pay option rather than lose money by selling repossessed vehicles at auction prices.
If you can live with this risk, it may be better to not reaffirm a debt even if you are not behind in your payments or otherwise in default. You can then make the payments informally to the best of your ability while making certain that you maintain full coverage insurance at all times, pay taxes, make all payments on time, etc. You may request that creditor send regular statements to you even if you do not reaffirm, but there is no guarantee they will send them.
Even if you do not reaffirm your car loan, there is another option to keep your car. You can redeem the car for the fair market value. To do so, you most likely will need a lender to step in and provide you with funding through a redemption loan. This often results in the debtor keeping the car at a reduced monthly payment even though the debtors interest rate has increased.
Unless there is a decent amount of equity in the home, mortgage reaffirmations do not provide a significant advantage. The typical chapter 7 debtor does not have much equity in their home. If he/she did, he/she would probably not be in chapter 7 bankruptcy. Furthermore, depending on how much property the debtor could exempt under their states exemption laws, the debtor might not want to file chapter 7 if there was enough equity that the trustee could liquidate the house to pay the debtors creditors.
By signing a home mortgage reaffirmation agreement, you are voluntarily deciding to have your largest debt survive the bankruptcy. In the event that some financial disaster occurs to you or your family in the future, you will not be able to walk away from this debt due to the signing of the reaffirmation agreement. Even without a reaffirmation agreement, as long as you stay current on your payments, though, that should not cause you any problems as the mortgage company does not foreclose on a property as long as you stay current.
If you reaffirm a debt you are placing yourself in the same, or a worse, position with respect to the debt than you were in before you filed bankruptcy.
- You must pay a debt that you are not legally obligated to pay;
- If you default, the property securing the debt may be repossessed and you may be subject to a deficiency judgment;
- If you default, your wages, bank account, or property may be garnished;
- If you default, your credit will be further damaged;
- And most importantly, you have now tied yourself to the house and must sell it or satisfy the mortgage to move away, whereas if you had not signed the reaffirmation, then you would have had the freedom to pick up and move whenever you wanted since there was no note obligation to tie you down.
It is also important to note that reaffirmation agreements must be filed with the bankruptcy court before the date of your chapter 7 discharge or else they are not binding. Finally, reaffirmation agreements are not part of chapter 13 bankruptcy, as the debtor in that chapter retains all of his/her assets in exchange for working out a repayment plan with creditors.