When you file either Chapter 7 or Chapter 13 bankruptcy, you’ll list whether your debts are secured or unsecured. Secured debts are debts where you have promised certain collateral, or property, against a loan. If you default on the loan, the creditor can repossess or foreclose on that property. Car and home loans are usually secured loans, but I’ve also seen some department store credit cards provide that require that you promise certain personal property that you buy at the store be secured against any charges you make on their card.
When you list your secured debts on your bankruptcy petition, you’ll also have to decide what you want to do with the collateral. For personal property (anything other than real estate) you have three choices. You can either surrender the property, redeem the property, or reaffirm the debt. Surrendering the property is just like it sounds: you’re going to let the lender have the property. When you redeem the property, you negotiate a purchase price from your lender. You might be able to buy it for less than you owe, but of course you have to come up with the money to buy it. There are actually lenders out there who specialize in this kind of loan.
When you reaffirm a debt, you are entering into a new contract with the lender (typically for same terms as the original contract). The new contract will not be discharged in your bankruptcy. If you default on that loan after your bankruptcy, the lender can repossess whatever property you secured the loan with and sue you for any money you still owe after they sell the collateral.
Reaffirmation agreements usually come up when it comes to car loans. There are some attorneys out there who won’t sign off on reaffirmation agreements under any circumstances, believing that bankruptcy should mean starting completely over and getting rid of whatever debt you have when you file. I think it’s more complicated than that and that there are good reasons for signing a reaffirmation agreement. Like most people, my clients rely on their cars to get them to work. They can’t risk losing their car or having to get a new one after they’ve filed bankruptcy. Our office will also try to get the lender to agree to let you keep the car as long as you keep the loan current. If they do and you stop making payments, all they can do is repossess the car. They can’t sue you for any deficiency.
As long as they can afford the car as well as the rest of their monthly living expenses, I will sign off on a reaffirmation agreement. The court will generally only approve it as long as you can show that you can afford the loan payment. Federal Rule of Bankruptcy Procedure 4008 requires a reaffirmation agreement to be filed no later than 60 days after the first date set for the meeting of creditors, although the court can allow more time.
Reaffirmation agreements are not required for home loans, although home lenders wouldn’t lead you to believe that. You should know a few important things about how your mortgage is affected when you file bankruptcy. The first is that the lender will stop sending you monthly statements for your payments, and it will also likely stop your ability to make online payments. Second, when you file Chapter 7 bankruptcy, your promise to repay your mortgage is eliminated. However, as long as you are current and keep making payments, the lender will keep accepting them and whenever you pay your mortgage in full, your home will be yours.
Finally, since your mortgage debt is technically discharged your lender will stop reporting those payments to the credit bureaus. That’s their right, of course. But it seems a pretty crummy thing to do. They’ll be happy to report those payments if you sign a reaffirmation. When they offer that, you need to stop and think about whether what they’re offering is enough for you to re-obligate yourself. I haven’t met a bankruptcy attorney yet who will sign off on a reaffirmation agreement for a mortgage, including myself.
If you have questions about whether you can keep your home and car when you file bankruptcy in Colorado, we hope you’ll come in for a free, no-obligation consultation with an experienced bankruptcy lawyer. You can use our online scheduling system or call 303.331.3403 to set a time that’s convenient for you.