A Chapter 7 bankruptcy is a legal action which allows a person to eliminate most of his or her debts. With respect to unsecured debts, such as general consumer debts, credit card debts, and any other debts that aren’t secured by some form of collateral, the vast majority, if not all, will be wiped out.
A question I usually get is what happens to secured debts in a Chapter 7 matter? A secured debt is when the creditor has a lien on your property to protect the creditor’s rights as to the underlying loan obligation. For example, with the typical car loan, the agreement with the lender will include the lender placing a lien on the car, in case you stop paying on the loan. This permits the creditor to repossess the vehicle.
If you face bankruptcy and have one or more secured debts, there are different options available to resolve the situation:
- You can surrender the property to the lender or other financing company and wipe out your personal liability for the debt.
- You can redeem the property by buying it outright for the then-market value. If you make a lump-sum payment for the fair amount value of any item of property, a bankruptcy court will allow you to keep the property and eliminate any remaining debt against that property. (The fair-market value has to be agreed-upon by the lender or ordered by the court). Let’s say you have a car worth $4,000, but the conditions of the financing agreement with the bank means you still owe $12,000 on the car. By writing a check for $4,000, you can keep the car and see the remaining $8,000 debt wiped out.
- Finally, you can sign a reaffirmation agreement. This is a contract between you, the debtor, and the creditor, which allows you to maintain your interest in the property. To use another example involving a car: You have a car worth $6,000 and you owe $9,000 in debt against the car. You don’t pharmacy have the funds to buy the car outright (as in example #2), but through a reaffirmation agreement, you agree to adhere to the terms of your car loan, thereby keeping the vehicle while continuing to make payments per the original contract.
A reaffirmation agreement is a good option if you wish to keep your car, but can’t buy it outright—a car being, of course, close to essential for many people.
A few other points on this subject:
- When you file for bankruptcy, any debts that are not reaffirmed or ordered by the court to be non-dischargeable or non-dischargeable by law are wiped out. In other words, if you do not sign the reaffirmation agreement, the debt against your car is eliminated—but since the lender has a lien on the car, they have the right to repossess the vehicle at any time.
- Many creditors, such as mortgage lenders, do not offer reaffirmation agreements. But, generally speaking, if you continue to make payments on your mortgage, they are unlikely to initiate foreclosure actions.
There are times when signing a reaffirmation agreement can have negative consequences. When you sign this agreement, it gets processed by the bankruptcy court. If you lose your job or otherwise default on your debt, the creditor has the same rights as if you never went through bankruptcy at all. The creditor can also refuse a payment and repossess the property, if they wish to.
If you face a bankruptcy situation and have secured debt on property you are thinking about keeping, a reaffirmation agreement is an option worth exploring. Be sure to contact an experienced, knowledgeable bankruptcy attorney before making any such decisions.
Are you in need of legal assistance regarding debt relief options or have any questions regarding the above topic? The Law Offices of Ian S. Topf offers a free consultation in a variety of issues, ranging from bankruptcy, debt collection defense, estate planning, family law, as well as DUIs and civil matters.