Collateral is something you own that you pledge to a creditor to guarantee you will pay the debt. The most common example of collateral is a car. People are often hesitant about filing bankruptcy because they mistakenly believe they will lose their car. However, in a Chapter 7 bankruptcy case, a debtor wishing to keep collateral, like a car, need only agree with the creditor to keep making the payments. This is known as a reaffirmation agreement.
A Chapter 7 bankruptcy debtor must express an intention to either surrender, reaffirm, or redeem collateral. A reaffirmation agreement is a post-petition contract between a debtor and secured creditor, whereby the debtor agrees to continue paying the secured debt payment as if the debt were never included in the bankruptcy. In exchange, the debtor keeps the collateral securing the loan.
Signing a reaffirmation agreement can be the best option for debtors, but not always. This is not something that you want to create or negotiate without the legal expertise of a Jacksonville Chapter 7 bankruptcy attorney.
When are Reaffirmation Agreements Useful?
A reaffirmation agreement is a voluntary agreement regarding a secured debt within your bankruptcy estate. Secured debt is any debt where collateral was used to ensure that the creditor is paid back if you default on your loan. If you can’t repay your loan according to the agreed terms, the secured creditor may seek to repossess the collateral. This type of debt is common with the purchase of homes and automobiles.
In Chapter 7 bankruptcy, the secured creditor retains their right to the collateral, leaving you with few options. If you can’t keep up with payments on your secured debt after discharge, then you’ll need to surrender the property back to the creditor. However, in cases where you intend to keep the property, a reaffirmation agreement is often the best option.
When you sign an affirmation agreement during the course of a Chapter 7 bankruptcy case in Jacksonville, the secured asset is removed from your bankruptcy estate entirely. As the case proceeds, you’ll resume scheduled payments outside of the purview of the courts as if you had never filed bankruptcy at all.
These agreements are useful if you want a fresh financial start but do not want to give up your home, automobile, or furniture. This is a difficult decision for some debtors, as defaulting on a reaffirmation agreement leads to repossession or foreclosure of the secured asset.
If a debtor’s collateral is repossessed after bankruptcy, the executed reaffirmation agreement allows the creditor to pursue the debtor for any deficiency balance. For this reason, such agreements must be carefully considered.
Terminating a Reaffirmation Agreement
If you find that bankruptcy improves your financial situation to the point where you can afford to keep your home or car, a reaffirmation agreement removes this debt from your bankruptcy estate.
However, if you enter a reaffirmation agreement but then realize you can’t keep up with your payments, you can terminate the agreement. There are two timeframes where termination is possible. The first is any time within 60 days of filing the reaffirmation agreement. The second is any time prior to the discharge in the bankruptcy case. Canceling reaffirmation is beneficial if there is likely to be remaining debt after the creditor redeems the collateral. A discharge wipes away some or all of that remaining debt.
Alternatives to a Reaffirmation Agreement
As mention above, Chapter 7 debtors must state their intentions with regard to secured collateral, and reaffirmation is just one of the choices. Debtors can also surrender or redeem the collateral. Especially when it comes to automobiles, debtors believe they really have no choice but to keep making their normal car payment, but there are two other very attractive strategies.
A debtor may not want to keep their car for one or several reasons: mechanical problems, no longer practical, or too much negative equity. A debtor does not have to be stuck with a car they do not want. There are several lenders who will assist debtors with the purchase of a brand new or newly used car, even before their bankruptcy is discharged. Debtors can compare the new deal with their current situation to determine whether to keep their old car or get a new one.
Redemption is a fantastic tool provided by Bankruptcy Code Section 722. Redemption allows a Chapter 7 debtor to file a motion proposing to pay a secured creditor the fair market value of their collateral in one lump sum. The Court enters the Order Redeeming Collateral, and the debtor has 30 days to pay the lump sum.
Redemption is an especially great tool for furniture. Think about how expensive new furniture is and how cheap used furniture is. A debtor may owe a Rooms to Go several thousand dollars for furniture now worth several hundred dollars. The debtor gets to keep the furniture by paying just a few hundred dollars.
Redemption is frequently used to pay off cars that are way underwater. This is especially helpful when a lender rolls negative equity from a previous car into a debtor’s current car. The debtor may owe many thousands more than the car is actually worth. However, when it comes to redeeming cars, debtors typically don’t have the cash on hand to pay the fair market value in one lump sum.
Ideally, a debtor could pay for redeeming a car by borrowing against their 401k or other retirement account or by seeking a loan from a friend or family member. If neither of these options is available, there are lenders who will actually provide the funds necessary to pay the secured creditor the fair market value if it’s collateral. The interest charged by these lenders is very high, but because they are financing a much lower amount, the overall payments can still be several thousand dollars lower than a reaffirmation agreement.
Talk to a Jacksonville Attorney About Reaffirmation Agreements in a Chapter 7 Bankruptcy Case
You should never enter a reaffirmation agreement in a Chapter 7 bankruptcy case without advice from a Jacksonville lawyer. Before formally agreeing to continue payments on secured debt, let a legal professional review your case. The right legal counsel will determine whether this agreement is right for you. Schedule an initial consultation to learn more.