Bankruptcy eliminates your personal obligation on your debts. This includes your obligation under the promissory note for your car loan and mortgage. However, your bankruptcy discharge does not eliminate the creditor’s lien against the property. This means that although the creditor cannot demand payment, the creditor may still have the right to foreclose on your mortgage or repossess your vehicle if you do not pay the debt.
Your Chapter 7 bankruptcy papers must indicate your intention regarding your secured debts (debts for which you have pledged property as collateral – like mortgages and car loans). Under the current bankruptcy law, you can select to either keep the property and pay the debt (reaffirmation), buy the property from the creditor by paying the market value of the property (redemption), or return the property to the creditor (surrender).
Surrendering the Property
If you do not want to keep the property, you can simply return the property to the creditor. Surrendering property in Chapter 7 satisfies the creditor’s lien on the property and discharges your personal liability on the debt. However, keep in mind that you are still the legal owner of the property until it is legally transferred to the creditor. Until the creditor takes title, you will be responsible for the property and will need to pay any homeowners association (HOA) fees that came due after your bankruptcy filing date, and maintain your homeowner’s insurance and vehicle insurance.
If you want to keep your car or other personal property (not real estate), you can pay the creditor the value of the property in a one-time, lump sum payment. Redemption is a great option if you don’t owe a lot on your car or if you owe more than it is worth. The obvious downside to redemption is that, even if it is a great deal, most people who file bankruptcy cannot afford to make the cash payment. Some debtors borrow the money to redeem from family members or finance the lump sum payment through loans from banks or credit unions that offer 722 redemption loans. There are advantages and disadvantages associated with redemption loans that you must consider before borrowing. If you opt for a redemption loan you will need to file a motion with the court, most lenders will handle the process for you. Some banks that offer redemption loans are:
Fresh Start Loans: https://www.freshstartloans.com/
US Bank: https://www.722redemption.com/
If you want to keep the property but redemption is either unavailable or unfeasible, you can keep the property by “reaffirming” the debt. Under this option, you agree to remain liable and you re-commit to continue paying the debt after your bankruptcy is over. In return, the creditor promises that it will not repossess or foreclose on the property so long as you continue to pay the debt according to the terms of the reaffirmation agreement.
If you decide to reaffirm a debt, you must do so before your bankruptcy discharge is entered. The reaffirmation agreement must be signed by you and the creditor and filed with the court. If your attorney does not sign the document, or you do not have an attorney, the court will usually schedule a hearing and the agreement will become effective only after it has been reviewed and approved by the bankruptcy judge.
Your Right to Cancel the Reaffirmation Agreement
You have the right to cancel (rescind or undo) the reaffirmation agreement within 60 days after it is filed with the court or at any time before the entry of your discharge, whichever occurs later.
To rescind a reaffirmation agreement, you must mail a written notice to the creditor stating that you are withdrawing your decision to reaffirm and revoking the agreement. Send the original letter to the creditor and a copy to the clerk’s office to be made part of your file.
Should you Enter into a Reaffirmation Agreement?
Reaffirmation agreements are disfavored because they contradict the primary purpose of bankruptcy, which is to provide the debtor a fresh financial start. By signing the reaffirmation agreement you are agreeing that if you default later on, the creditor can foreclose or repossess the property AND sue you for the balance on the loan.
You are not required to reaffirm a debt, and you should only do so if reaffirmation is in your best interest. If you are current on your mortgage, you may not need to reaffirm your mortgage to retain the property (as long as you keep making your payments).
If you are unsure about the reaffirmation process or have questions about the agreement, please contact us for free counsel and advice before you sign.