Chapter 7 Reaffirmation Agreement
Most debts are included in a Chapter 7 bankruptcy discharge. Not only are unsecured debts like medical bills and credit cards included, but secured debts like your vehicle loan and home mortgage are also part of the Chapter 7 discharge. The Chapter 7 bankruptcy discharge eliminates your personal obligation to pay a creditor, but does not generally strip away a secured creditor’s right to collect against the loan collateral. In plain English, a secured creditor must be paid or the property securing the debt must be returned.
Many times Chapter 7 debtors want to keep property used as collateral for a loan and opt to execute a bankruptcy reaffirmation agreement. The reaffirmation agreement is a new contract between the Chapter 7 debtor and the secured creditor in which the debtor agrees to continue paying a dischargeable debt (such as an auto loan) after the bankruptcy. The secured creditor agrees to not repossess the property. Reaffirmation agreements are only available to Chapter 7 debtors.
To reaffirm a debt the agreement must be filed with the bankruptcy court before the bankruptcy discharge is entered. The Bankruptcy Code requires that the debtor file a statement of current income and expenses that demonstrates the debtor’s ability to afford the terms of the reaffirmation agreement without creating an undue hardship for the debtor or the debtor’s family. It is important to carefully consider whether a reaffirmation agreement is right for your family. Reaffirming a debt means that the debtor remains personally liable for any subsequent default on the loan, and can be sued or have the property repossessed. When it is clear that there is not enough income to afford the debt, the bankruptcy court may not approve the agreement.
A reaffirmation agreement is a new contract and the parties are able to change the terms of the original agreement. This can mean a lower interest rate or a longer payment term to make the monthly payments more affordable. Creditors are sometimes agreeable to these changes because the alternative is a costly repossession.
Filing Chapter 7 bankruptcy does not mean that you will lose your car, house or other property. Most bankruptcy debtors keep all of their property. A reaffirmation agreement is just one way Chapter 7 debtors can keep property during bankruptcy. An experienced bankruptcy attorney can explain the legal options for discharging your debts and retaining your property.