What is a Reaffirmation in Chapter 7 Bankruptcy?
If you file a Chapter 7 bankruptcy, the court will require you to complete a form called a “Statement of Intention” indicating what you intend to do with debts that are secured to your property. In most cases, this means that the court is asking about mortgages and car loans.
Many people are often unnecessarily concerned when they learn that their mortgage and car loans are “included” in bankruptcy. Although any debt that you owe at the time of filing must be provided for in some fashion through your case, you can rest assured that notice of the bankruptcy does not mean that you will lose your property. Instead, you have several options regarding these debts.
First, you have to option to “redeem” the property, which means that you can satisfy the debt in full by making a one-time payment in the amount of the secured value of the loan. This option can be beneficial if the property is underwater, meaning that its fair market value is less than the amount owed on it. For example, if you own a car worth $5,000 but owe $8,000 on it, you can satisfy the car loan in full by making a one-time payment of $5,000. There are finance companies that provide loans for this purpose, but the terms of any such loan should be thoroughly reviewed with your attorney first. Court approval is also needed.
Alternatively, you can choose to “reaffirm” the debt, which means that you will not receive a bankruptcy discharge on it. Reaffirmation options should be thoroughly discussed with your attorney prior to filing, but as the law currently stands in Massachusetts, you should not be required to reaffirm in order to retain your property.
If you do not reaffirm the debt, then you will receive a discharge of the amount owed. This will not impact your ability to continue making payments and keep the property, and will not prevent the creditor from foreclosing/repossessing if they are not paid. However, if at some point in the future you are unable to make payments, then a discharge would eliminate any further liability if a foreclosure or repossession occurs.
If you decide not to reaffirm, creditors generally stop reflecting continued payments on your credit reports. And, depending on your lender, it might also be more difficult to obtain a refinance or mortgage modification.
On the other hand, many attorneys generally advise against reaffirmation because (1) these debts tend to be your largest and (2) foreclosure/repossession sale prices tend to be significantly deflated, and therefore large deficiencies can still be owed after them.
Please contact us today for a free consultation to review your options and goals for retaining your property in a Chapter 7.
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Culik Law is a Massachusetts Attorney / Law Firm. The posts on Culik Law’s blog are not intended as legal advice. If you have questions about your particular situation, CONTACT CULIK LAW for a Free Consultation.