Can I Keep My Car And Home That I Still Owe Money On?
Reaffirmation Agreements In Chapter 7
In order to keep property that the Debtor still owes money on, in most cases, the Debtor must continue to pay the debt even after bankruptcy. Some creditors will attempt to require the Debtor to reaffirm the Debt, it is a myth that you have to do this. Before a Debtor can enter into an agreement with the creditor to keep a particular debt outside of the bankruptcy discharge (also known as a “Reaffirmation Agreements”), the Court must find that reaffirming the debt (1) is in the best interest of the Debtor and (2) does not cause undue hardship on the Debtor and the Debtor’s family. The Court rarely allow Debtors to reaffirm unsecured debts because it is rarely in the best interest of the Debtor as such debts are discharged! And reaffirming a debt that later ends up being repossessed, may in fact result in income taxes owed on the debt which would not be the case without a reaffirmation!
Under the undue hardship factor, the Court requires that the Debtor have the ability to pay on reaffirmed debt. This means that if paying on the jet ski will cause the Debtor to be short of cash ever month, the Court will likely deny it.
An attorney can help prepare or review reaffirmation agreements with creditors after the bankruptcy case is filed. If no reaffirmation agreements are filed, the debt is automatically discharged.
If you are intending to keep making payments on a secured debt such as a residence or vehicle, the fact you are making payments on time or late should not be reported to the credit reporting bureau absent a reaffirmation as the debt is discharged. As a result, you may want to consult with your attorney a couple weeks after your case is filed to allow time for the creditor to receive notice of the filing and transfer over into the bankruptcy department. Some clients want to spend the money to obtain such possible reaffirmation agreements, others do not. That option is up to clients and the creditor. There is a deadline in the court’s notice in which said agreements must be filed by such deadline; as a result, don’t wait until the end of your case if you want advice on such agreements.
Most creditors of secured vehicles want your money and not your vehicle even if you do not reaffirm. Rarely do creditors repossess a secured vehicle when you are not in default; Alaska Federal Credit Union is one of the exceptions known to repossess sometimes even when current if a reaffirmation agreement is not executed and approved by the court.
Finally, in some cases, a secured creditor has a security interest in your vehicle and you owe them other monies on unsecured debts leading to a problem known as “cross-collateralization” in which case the creditor may not release your title to your vehicle even though you pay off the vehicle in full! Whether that is legal or not will depend on a Washington Court case ruling on such facts. But in such situations, most debtors simply allow the vehicle to be repossessed and not have to worry about that problem; some debtors desire to attempt a reaffirmation in such cases.
In a Chapter 13, secured debts are governed by the plan and thus not reaffirmed.
If you have questions about the reaffirmation process contact me right away. My consultations are always free.