Reaffirmation agreements for old debts
A Chapter 7 bankruptcy case doesn’t eliminate all debts. Some debt survives because it cannot be discharged in a bankruptcy case. This could include recent taxes or internal support obligations such as child support and child support. There can also be other types of debt that you want to keep even after bankruptcy is complete.
What is secured debt and unsecured debt?
If your goal is to pay off your debts, you may be wondering why you want to try to make up for anything that you don’t have to do. It has to do with the type of debt we’re talking about. Much of the debt that you must include in bankruptcy is unsecured. That means there is no collateral that a creditor can use to pay the debt if you can’t or can’t make the payments. Unsecured debt includes credit cards, medical bills and many personal signature loans.
When you put collateral, we call that secured debt. Secured debt actually consists of two separate agreements. One of them is the promissory note or promise to pay. The other is the security agreement, in which you agree that the creditor can be assured of paying the debt if necessary. Secured debt includes mortgages, auto loans, boat loans and some loans for other personal items.
A Chapter 7 case will likely unload the promissory note on a secured debt, but it will not affect the security agreement. Therefore, you could come out of bankruptcy without personal liability on the car loan, but creditors still have rights in the car and can take possession of it again after the case is over.
A reaffirmation agreement can protect your collateral
A re-confirmation contract is a contract that you sign with the secured creditor that takes the total debt out of bankruptcy. You stick to the debt, but you get the collateral as long as you keep the terms of the note and not the standard on it.
Basics of the reaffirmation agreement
As the bankruptcy discharge wipes out your personal liability for most of your debts, that previous contract you signed for a car loan is effectively wiped out. If you sign a renewed confirmation agreement, you agree to assume the same old debts that would otherwise have been wiped out by the bankruptcy. The agreement is usually a form from the bankruptcy judge, which the lender will partially fill with information such as the new interest rate, balance, and payment information.
Here is a link to the official cover page for a renewed confirmation form.
You or your bankruptcy attorney must also fill out several sections in the agreement to show the bankruptcy judge that you can afford to make the payments. So if your bankruptcy plans show that you have a negative monthly income, it will be hard to show how you can make the payments (unless you get help from a friend or family member). In fact, your lawyer will be asked to confirm that the payments will not cause you to “undue hardship”.
Why do you want to reaffirm?
As mentioned above, a secured creditor can repossess your property (in the car in our example) after you receive your bankruptcy discharge if you don’t confirm the debt. Sometimes the creditor can file an application during your bankruptcy called a motion to raise the automatic lift motion to get the ball rolling earlier, although we find these motions more often in Chapter 13 cases of whether you stop making payments for a car or a Home you’re trying to protect.
You may need bankruptcy court approval
Even if you sign the re-confirmation agreement and send it back to the lender, the lender must file with the bankruptcy judge before your discharge is entered. Usually the re-confirmation agreement will not be set for a hearing before the bankruptcy judge. The re-confirmation will be set for a hearing under certain circumstances:
- You are filing the Prose case (you will not be represented by a lawyer).
- Your attorney does not certify that the payment will not cause you “undue hardship”.
- Even if your attorney certifies the re-confirmation, the income and expense information you provided in your bankruptcy plans or on the confirmation form does not support enough disposable income to make the re-confirmation affordable.
At the hearing, the bankruptcy judge will ask you questions to determine if you really need security and if you can make the payments.
The agreement is not effective if the court disapproves. Many times, judges cannot agree to an agreement unless the lender doesn’t give you a lower interest rate, a balance reduction, or some other concession. If the judge disagrees with the agreement, the agreement has no effect and you might as well tear it apart! However, if the judge approves the agreement, the agreement is your new contract with the lender.
Redeeming the collateral
Another option is to redeem security for its value. The disadvantage of aa redemption is that you usually pay the lender a lump sum. This is an amount that you can negotiate with the creditor. You can use your own resources, someone can lend or lend you the money, or you can borrow the money from your bank. Some companies even specialize the repayment amount when financing.