Reaffirming a Secured Debt in a Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is a great way of wiping out unsecured debts like medical debt, credit card debt, and personal loans. However, you will not so easily get free of secured debts, such as a car loan or a home mortgage, because those loans are backed by collateral. Although the bankruptcy might wipe out the debt, your creditor still has a security interest in the collateral, which means they can seize it. If you have kept current on your payments, you might reaffirm a secured loan as part of your bankruptcy, which will allow you to keep your collateral.

A Common Example

There are many wrinkles to reaffirming loans in a Chapter 7 that are too complex to deal with here. But let’s deal with a basic example: your car loan. If you have been diligently paying your car loan throughout your financial difficulties, you might want to keep the car. Typically, your car lender will not have any problem letting you reaffirm the loan in bankruptcy so that they can get back the full amount that they lent to you.

If you have not been current on your loan, then the most likely scenario is that the lender will seize your car. Although the automatic stay will prevent any repossession, your creditor can ask the judge to lift the stay and then take it.

Reaffirmation Agreements

To reaffirm your debt, you’ll need to sign a reaffirmation agreement, which your creditor should draft. Review it with your attorney and have him or her sign, and then sign it yourself. Your lawyer will submit this document to the court before your discharge, which typically happens a few months after filing your Chapter 7 petition.

By reaffirming a loan, the debt is excluded from your list of dischargeable debts. Both the creditor’s lien on the car and your personal obligation on the debt survive your bankruptcy as if you had never filed. Essentially, you are taking a gamble that you will be able to continue making payments on your secured debt even after bankruptcy. If you can’t, then your creditor can seize the collateral.

Rescinding the Agreement

It is entirely possible that you might change your mind about affirming a secured debt before your bankruptcy is discharged. For example, you might discover your car needs thousands of dollars in repairs, which pushes down its value. At that point, you might be happy letting the lender repossess the car and discharging the debt obligation in bankruptcy.

You have a short deadline for rescission which you must meet. You must rescind by the time the court discharges your debts or 60 days have passed after filing your reaffirmation agreement, whichever occurs later.

Discuss Reaffirmation with a Florida Bankruptcy Lawyer

At Nowack & Olson, our Plantation bankruptcy attorneys have handled hundreds of reaffirmations, and we are here to discuss whether reaffirmation works for your situation. To schedule a free consultation, call us toll-free at 866-907-2970 or send an online message. There is no reason to delay.

Resources:

law.cornell.edu/uscode/text/11/362

law.cornell.edu/uscode/text/11/524#c_4