04 Oct Should you reaffirm a debt in bankruptcy?
By Atty. Crispin Caday Lozano
A good bankruptcy attorney will guide clients whether or not to reaffirm a secured debt. There are considerations before a debtor would want to reaffirm a debt. In a Chapter 7 bankruptcy, the debtor must submit to the court a schedule (Schedule D- Creditors Holding Secured Claims) indicating all of their secured debts (mortgages, vehicle loans, and purchase money loans for furniture, jewelry, or household goods, as well as any other debt for which you have pledged property as collateral to the creditor). In addition to filing a list of all secured debts, Chapter 7 debtor also file a form called the ‘Statement of Intention’.
- What is a Statement of Intention?
- The Statement of Intention is required to be filed in Chapter 7 cases. It is not required in Chapter 13 cases. Statement of Intention is a form completed by the debtor that advises the court, the Trustee, and your creditors what you intend to do with your secured collateral such as your home or car. This document also applies to leases. It must be filed within thirty (30) days after the debtor files a petition under Chapter 7 or on or before the 341(a) Meeting of Creditors. It requires the debtor to state the following:
- whether the property will be surrendered or retained,
- whether it will be claimed as exempt,
- whether the debtor intends to redeem the property, and
- Whether the debtor intends to reaffirm the debt secured by the property.
- What is redemption in bankruptcy?
- In redeeming a debt, a Chapter 7 debtor pays the fair market value of the collateral, usually in one lump sum — in full satisfaction of the debt. This option can be especially helpful when the debtor’s collateral is underwater, meaning the value is less than the loan amount.
- What is Reaffirmation in bankruptcy?
- In reaffirming a debt, the debtor agrees to remain responsible on the debt after bankruptcy and will continue making payments to the creditor, while keeping the collateral. Once the debtor signed the reaffirmation agreement, he or she will have 60 days from the date of the signing or up until the day the court discharges the case, whichever is later, to change his or her mind and withdraw the agreement.
However, once the court enters the Chapter 7 discharge, the agreement is binding and in effect. If the debtor defaults on a reaffirmed debt after the court entered the discharge, the creditor can repossess the collateral and sue the debtor for any deficiency balance, fees and costs.
- What are the disadvantages of Reaffirmation Agreements?
- The following are the disadvantages of reaffirmation agreements:
- Instant Liability – A reaffirmation agreement binds you in contract. If you missed payments in the future, it could mess up your new credit, cause you to lose the property, and make you responsible for the balance of the loan.
- Approval of Lawyer is Needed – Your lawyer must review and examine all the circumstances and only sign the reaffirmation agreement if he believes it will not inflict an undue hardship on you and your family. Your lawyer must determine and decide if you are in a good financial position to repay the debt.
- Approval of the Court is Needed – Reaffirmation Agreement is not accepted until the U.S. Bankruptcy Court approves the terms. Usually, bankruptcy courts are not delighted to let you carry on personal liability when you have already shown that your expenses go beyond your post-bankruptcy income.
Q, What are the basic considerations when signing reaffirmation agreement?
A. The following are some tips when signing a reaffirmation agreement:
- Try to reduce the principal and interest, or stretch out the payment length. This is restructuring the payment terms to be more favorable.
- You have 60 days to change your mind.
- In California, most secured creditors are willing to let you keep making payments without signing a reaffirmation agreement. Chapter 7 Bankruptcy lawyers often refer to this as the KEEP and PAY OPTION or RIDE THROUGH.
- Debt settlement or debt consolidation are expensive and not a guaranteed way to reduce your debt because some creditors will sue you. It will take three years to complete and your credit will become worst during that period. In bankruptcy the debts are discharged within three months.
- Bankruptcy will actually improve your credit within one year because your unsecured debts are discharged. Although the bankruptcy will be in your records for 10 years, not filing bankruptcy will make your credit even worse until most your debts are paid.
- If you are being sued by your creditors, most money judgment can be eliminated in bankruptcy.
- Collection actions continue and you can be sued if you are in debt settlement.
- Chapter 7 will eliminate all unsecured debts. If you are near retirement age, you must eliminate most of your debts.
- Bankruptcy will stop foreclosure actions. If your trustee sale date is 10 days before, you can still file for bankruptcy.
- If your salary is being garnished, you have a court case about debts or you are being harassed by creditors, bankruptcy can stop garnishment, court cases, harassing creditors and eliminate the debt.
- Bankruptcy is cheaper, faster and safer than debt settlement which has no guaranteed success.
- Preserve your health, eliminate stress and live a happy life by eliminating your debts which is the root of all problems.
Note: This is not a legal advice and you should consult with an attorney about your case.