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Whenever someone considers filing a bankruptcy case one of the primary concerns is whether they are going to have to give up their possessions. You want to know going in if you are going to have to give something up, whether it is because you are behind on payments or because it has value for a trustee to sell and share amongst your creditors. In this article we will examine what happens to your property generally, and how to deal with property securing a debt, such as a car.
What happens to your property in a Chapter 7 bankruptcy?
When you file a bankruptcy case, your property becomes part of the “bankruptcy estate.” The trustee assigned to your case has access to your bankruptcy estate, and can liquidate or sell the assets that belong to your bankruptcy estate. This is offset, however, by exemption laws, which are laws that allow you to protect all or some of your property.↑ Back to top
Secured vs. Unsecured debt
Unsecured debt is when the money you owe is not tied to something tangible. Debt from credit card or medical bills make up the bulk of most people’s unsecured debts. Unsecured debts can usually be discharged in a Chapter 7 case.
Secured debts, on the other hand, are directly tied to some sort of collateral or property -- like a house or a car.
Your house is directly tied to your mortgage. If you default on payments you could face a foreclosure. Your car payment is secured by your car. If you stop paying or get behind on your payments, your car could be repossessed. The important thing to know about secured debt with respect to bankruptcy is that while you can walk away from the obligation to continue paying the debt, the creditor does retain their security interest. That means the collateral reverts back to your creditor when you are no longer making payments.
How can you protect your possessions?
You can protect certain items up to certain dollar amount by the use of exemption laws. As such, bankruptcy exemptions function as built in protection. Debtors are usually able to avoid turning over most, if not all of their property by the proper use of exemptions. When you file an individual Chapter 7 bankruptcy case it is important to understand what exemption laws apply in order to protect the majority of what you own.
Another way to protect your possessions is to enter into a “reaffirmation agreement” with the creditor.↑ Back to top
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What is a Reaffirmation Agreement?
A reaffirmation agreement is a contract that you can enter into in which you agree to remain responsible for a debt so that you can keep the property. In other words, it’s a promise to pay in exchange for keeping the property you are seeking to retain. In order to be able to enter into a reaffirmation agreement you need to be current on your payments, and any equity in the property must be fully protected by your exemptions. Typically reaffirmation agreements in chapter 7 cases are for a car.
Reaffirmation agreement are strictly voluntary and cannot be compelled by the creditor to enter into such an agreement. Any agreement needs to be entered into and filed prior to receiving your discharge at the end of the case to be valid.
An alternative to a reaffirmation agreement is to redeem the property for its current value. The catch here is that you have to have access to a lump sum, which many people don’t have.↑ Back to top
How does a reaffirmation agreement work?
A reaffirmation agreement needs to be filed with the court to show written acceptance of the new debt. These agreements are generally drafted and filed by counsel for the creditor. Reaffirmation agreements are also subject to court approval, and the judge may deny an agreement for a variety of reasons, including if they believe you cannot afford it, if the debt significantly outweighs the current value or if the interest is too high.↑ Back to top
When should I sign one?
You should be very thoughtful about whether you should enter into a reaffirmation agreement. There are pros to signing one, such as keeping your secured property and avoiding the need for a lump sum payment. You also might want to sign an agreement if you have a cosigner on the debt. Perhaps most importantly this can provide an opportunity to renegotiate and get a lower payment or a better interest rate.
The major reason to not sign off on a reaffirmation agreement is because it will guarantee that you cannot walk away from the debt going forward. That is because if your chapter 7 successfully continues to discharge, you are prohibited from filing another chapter 7 case for 8 years. If you become behind at any point and the creditor does repossess the property then you will no longer have it and still be liable for the difference between your contract amount and the value of the item.
You should only enter into a reaffirmation agreement if you reasonably believe that you will be able to pay off the balance. Another way to look at it is to not sign off if you could replace the property for a lower amount than what you owe.↑ Back to top
A reaffirmation agreement is a binding contract, and as such you should give careful consideration to the costs and benefits prior to entering into one.↑ Back to top