Common situations I come across with bankruptcy inquiries:
“I want to file for bankruptcy but I don’t want to lose my car.”
“I have a mortgage that I’m able to pay but I’m struggling. Would I lose my house if I file for bankruptcy?”
Filing for bankruptcy relief generally relieves a debtor from substantial personal economic liabilities to allow one to have a new financial start. When you seek bankruptcy relief, the objective is to get rid of some, if not all, of your ever-increasing debt. In some cases, a person’s desire to keep certain assets is in question due to debts that are attached to those assets (i.e. secured debts), either as the original purchase loans or as debts that attached after the purchase (e.g. collateral loans where the asset was used as collateral to borrow money). In these cases, if you wipe out the debt, the lender/creditor maintains the security interest in the asset and, most likely, will repossess the asset.
So if you are getting rid of your mountain of debt, what do you do with your secured ones? There are different options available to resolve the situation:
- You can surrender the property to the lender/creditor 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 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 assets (e.g. vehicles), but can’t buy it outright—a car being, of course, close to essential for many people.
Other advantages to signing a reaffirmation agreement include requiring lenders to report the timeliness of payments and loan status on the debtor’s credit report, as well as the possibility of opening the door to a renegotiation on the terms of the debt, especially if the lender believes you may walk away from the asset (and debt liability) under the current terms of the loan agreement.
The major disadvantage to a reaffirmation agreement is the overall general intent of allowing said agreements: they are designed to protect the creditor as they restore the debtor’s liability and allow said liability to pass through the bankruptcy discharge. I ask my clients all the time, “Are you absolutely sure you can finish paying off the loan?” If you default after you reaffirm, the lender can REPOSSESS the asset(s) and SUE you for the balance. While the overall benefit for a successful reaffirmation may outweigh the possible detriment, I feel obligated to generally discourage reaffirmation agreements because of the likelihood of remaining in debt after the bankruptcy action has finished.
Therefore, if you should ever have to file for bankruptcy relief and be faced with the possibility of reaffirming a debt, you should only consider a reaffirmation agreement when:
- You are absolutely sure that you can pay off the balance of the loan amount; and
- This is the only way you can keep your property or asset
In any event, be sure to discuss the possibility of reaffirmation agreements with your debt relief attorney before you file for bankruptcy relief so that you know your options up front.
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 on a variety of issues, ranging from bankruptcy, debt collection defense, estate planning, family law, as well as DUIs and civil matters.