Imagine you’re driving down a road of financial difficulties and decide to take a detour called “Chapter 7 bankruptcy” to help you get your car payment back on track. This detour has a particular signpost called a “reaffirmation agreement.”
This agreement is like a contract that gives the debtor and your creditors (the people you owe money to) a chance to make you responsible for a debt again, even if the bankruptcy was by law supposed to wipe it away. It’s like giving them a second chance to ask you to pay up.
Benefits of A Reaffirmation Agreement in Chapter 7 Bankruptcy
Reaffirmation agreements offer a secure path to keeping your collateral, like a car, if you follow the agreement’s rules and make your payments on time. When you stay up-to-date with auto loan payments, the lender cannot take back what you’ve bought.
Reaffirmation may allow you discuss new terms for various secured loans, such as lowering your payments, interest rate, or total payment over time. But remember, the lender doesn’t have to agree to these new terms, and most reaffirmation agreements stick to the same terms as the original deal.
Downsides of A Reaffirmation Agreement
You’ve got it right! When it comes to reaffirmation agreements, there’s a critical downside you need to be aware of:
Biggest Drawback: The major downside of signing a reaffirmation agreement is that it locks you into debt, meaning you will remain liable on the debt even after you receive your bankruptcy discharge. If you need to catch up on payments for something like your car loan, the lender can take your car back. If you’ve agreed to reaffirm the debt, you’re on the hook for paying any remaining amount owed even after they take it back. If you don’t pay, the lender can take legal action. After they obtain a judgment for not paying the loan back and having a remaining balance, they will begin garnishment actions, which may include taking money from your paycheck or bank account – this is called garnishing.
Here’s why this is a significant concern:
– Long-Term Impact: After a Chapter 7 bankruptcy, you can’t file for another Chapter 7 bankruptcy for eight years. So, if you’ve reaffirmed debt and struggled to pay it off, these collection efforts could affect you for many years, and your only bankruptcy option thereafter would be a chapter 13 reorganization bankruptcy.
– Choose Wisely: You should only agree to reaffirm if you can handle paying off the remaining balance by affording the regular monthly payment on a long term basis. It’s a big decision that affects your financial future.
While reaffirming a debt might be a way to maintain possession of something like your car, it’s crucial to do so with a clear understanding of your long-term commitment. If there’s any doubt about your ability to pay, considering other options is usually wiser.
How Reaffirmation Agreements Work: A Step-by-Step Guide
If you’re thinking about sticking with debt after filing bankruptcy again, here’s how reaffirmation agreements play out in bankruptcy cases:
- Eligibility and Equity: You can only consider a reaffirmation agreement if you’re up to date on your mortgage and car payments and the value of your car (minus what you owe on it) is protected by specific rules called exemptions. These rules vary depending on where you live. Remember, the mortgage and car’s value minus what you owe is called equity.
- Voluntary Choice: Nobody can force you into a reaffirmation agreement. It’s your decision, and you remain responsible for it.
- Let the Court Know: Tell the court about your wish to reaffirm a debt. You do this on a form called the “Statement of Intention.”
- Contact the Lender: Mail a copy of your “Statement of Intention” to your lender. Ask them to create a reaffirmation agreement and send it to you.
- Read and Sign: When you get the agreement from the lender, read it carefully to make sure the terms are accurate. If it looks good to you, sign it. Ensure you provide any necessary information on-time payments to show that you can continue making payments.
- Timely Submission: Return the signed agreement to the lender within 45 days of your first creditor meeting with creditors.
- Court Approval: The lender’s bankruptcy lawyer will submit the agreement to the bankruptcy court. The court will then decide if it willapprove it. They consider whether you can afford to keep paying the loan if the debt exceeds the car’s value or the interest rate is too high.
- Financial Review: The court reviews your post-bankruptcy budget (in Schedules I and J) to ensure you can easily handle the loan payments. If not, they might reject the agreement. Their main concern is your financial security, interest, and well-being.
Remember, bankruptcy is a fresh start. If the court thinks sticking with the debt isn’t the best idea for your financial health, they might refuse the reaffirmation. But even if that happens, you’ll still have a car. The bankruptcy judge may find it better to return the vehicle and buy one that fits your new budget.
Differences Between Secured And Unsecured Debt
Secured Debts: These are loans where you offer something valuable (like a car or a house) as a promise to the lender that you’ll repay the borrowed money. This helpful thing you offer is called collateral. If you can’t repay the loan, the lender can take that collateral to compensate for the lost money. Because they have this security, these loans are considered safer for lenders, so the risk of you not paying is lower.
Unsecured Debts: With these loans, there’s no specific thing you promise to give the lender if you can’t pay. Credit card debt and medical bills are common examples. Since the lender doesn’t have a guarantee like collateral, these loans are considered riskier. If you pay, the creditor can directly take back something valuable from you.
Remember, when dealing with secured debts, the lender has something to fall back on if you can’t pay. Unsecured debts rely more on your promise to repay and your credit history. A bankruptcy attorney’s help can make a difference in your specific case.
Before You Go To Bankruptcy Court
If you’re interested in a reaffirmation agreement, here’s how you go about it:
Timing is Key
You need to express your interest in a reaffirmation agreement after you’ve filed for bankruptcy but before the lender’s claim on the collateral of secured debt (like your car) is canceled. This usually happens when the bankruptcy process is still ongoing.
File a Statement
You start by submitting a “Statement of Intent” to the court. This tells the court and creditors you want to reaffirm a specific debt.
Notify the Lender
You may also send a copy of this “Statement of Intent” to the lender. This lets them know you’re considering a reaffirmation agreement. Most lenders after receiving the notice of intent will reach out to your attorney providing the required reaffirmation agreement.
Working with a bankruptcy lawyer is often a good idea. They can help you review and negotiate the reaffirmation agreement terms. They know the legal ins and outs to ensure your best interests are considered.
Review by the Judge
Sometimes, there might be a reaffirmation hearing where the judge looks at the agreement. This ensures that both you and the lender are being treated fairly. The same judge reviews and ensures it’s a good deal for both parties.
Signing and Filing
Once you and the lender have agreed on the terms and conditions, you put your signatures on the reaffirmation agreement documents. Then, the agreement is submitted to the court. This makes the agreement official and legally binding.
Remember, seeking professional advice and guidance from a bankruptcy lawyer can help you navigate this process smoothly and make decisions in your best interest.
Keeping Your Car After Bankruptcy
When you originally got a loan for your car, you made a deal with the lender. This deal included a set monthly payment and specific rules to follow. A reaffirmation agreement is like a promise you make to the lender during a bankruptcy case. It says you’ll stick to the original deal and keep paying off the car loan, even while going through bankruptcy. In return, you’re allowed to keep the car.
Some lenders might ask you to sign a reaffirmation agreement to keep the car after filing for bankruptcy. Others might let you own the vehicle if you make payments, even if you don’t sign this agreement.
Lenders have a say in what you do with the car because car loans are called secured debts. This means the car guarantees to repay the loan, and the loan gives the lender certain rights over the vehicle. They can take back the car legally if you don’t follow the loan rules. Whether you sign a reaffirmation agreement, you must pay off the loan to keep the vehicle. This rule applies even after you’ve filed for bankruptcy.
In conclusion, a reaffirmation agreement is a significant decision in bankruptcy, offering a chance to keep assets while committing to debt relief. Balancing the benefits of asset retention against the potential long-term obligations is crucial, making expert advice a valuable resource in navigating this complex terrain.