Generally, you file a Chapter 7 bankruptcy to obtain a discharge, or cancellation of your responsibility to pay your “dischargeable” debts. However, there are times when you want to keep certain debts in order to retain the collateral that secures those debts. You can do this by reaffirming certain debts.
The first thing to understand is what is a reaffirmation. To reaffirm a debt in bankruptcy is to reinstate the debt that would otherwise be discharged. In other words, if you reaffirm a debt, it is as if you had never filed bankruptcy on that debt. Because of this, it is very important that you think long and hard about reaffirming debts in your bankruptcy case.
The next item to consider is the type of debt that you wish to reaffirm. Generally, you would only reaffirm a debt to keep the collateral that was securing that debt. Secured debts break down into three general areas: home, cars, and furnishings (or other personal property). Let’s look at each area.
The lender or lenders on your home would be very happy if you reaffirmed the debts on your home. However, make sure to thoroughly consider the consequences. If you reaffirm and for any reason you can’t make the payments in the future, you are stuck with the debt. (Remember, it is as if you had never filed bankruptcy on any debt you reaffirm.) So, if you get sick, lose your job, have a job transfer and can’t sell your house, or if the lender forecloses for any reason, you might be forced to pay the deficiency balance, which could be very large.
You might be worried that if you declare bankruptcy and don’t reaffirm the debt on your house that the lender will take the house away. However, this is generally not the case. If you are current on the payments (or can become current quickly), continue to make your payments to the lender, and pay your property taxes and homeowners insurance, you will be able to keep your home. In this way, you have the advantage of receiving a discharge of the debt (meaning you don’t have to pay if you have to move someday) and staying in the house.
The only real downside that we have seen to this approach is that the lenders do not report that you are making payments on the loan to the credit bureaus. However, you are able to provide this information directly to the credit reporting agencies and the lender is required to give you at least an annual statement showing your mortgage balance.
Auto lenders are a different story. Generally, auto lenders will take possession of the automobile if you don’t reaffirm the debt. The main reason for this is the rapid deprecation of automobiles and the fact that most courts have ruled that they can require a reaffirmation in order to keep a vehicle. However, if the lender allows you keep the car, as long as you remain current on the payments and keep the auto insured, you can continue to retain your auto. Again, the lenders generally will not report your payments to the credit reporting agencies, but you can do that for yourself.
If you are in serious need of keeping your automobile, you might consider a Chapter 13 bankruptcy which could provide several other advantages not found in Chapter 7, such as lowering payments and interest rates or reducing the actual balance due.
Furnishings (other personal property)
If you have purchased consumer goods from a seller and have financed some or all of the purchase price, and if that seller retains a list of what they sold you (and trust us, they do), then that seller has an automatic lien on what you financed. Again, you might be faced with the decision to keep the merchandise or pay the creditor. Generally, the discharge is more valuable than the items you purchased and you can surrender them to the seller or creditor and replace the items. However, if you must keep the goods, you can reaffirm the debt and keep the merchandise. Again, if this is the case, a Chapter 13 bankruptcy can be much more effective in helping you to keep the merchandise while lowering the amount you have to pay to keep it.
No matter what your situation, it is very important to have experienced legal counsel to determine whether to reaffirm debt in a Chapter 7 or whether some other option might be less expensive for you.