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Suggestions for Reaffirmation In Bankruptcy

Posted by David Falvey on Thursday, August 6th, 2015 - 33 views

Chapter 7 debtors, if they end up passing the means test, can discharge all of their unsecured debts. Secured assets are normally sold by the Trustee in Bankruptcy or the creditor with the security interest acquires the property.

Chapter 13 is a possible option for debtors with a lot of secured property who want to keep their property. Chapter 13 debtors propose a plan to pay the arrears and continue the monthly payments. The plan has to be approved by the Trustee.

Some Chapter 7 debtors can save their assets through their state or federal personal exemptions. These exemptions, if the math is right, let a debtor keep a car, work tools and other assets. In order for the math to work correctly, the equity in the property has to be less than the exemption.

Debtors with enough cash may be able to buy one or a few items outright at fair market value.

Fortunately, there is another option for Chapter 7 debtors. That option is known as a reaffirmation agreement. Essentially, it allows debtors the right to keep certain secured personal property provided the creditor agrees to continue the loan, the debtor keeps up the monthly payments and an agreement can be made on how the arrears will be paid.

Debtors cannot save their real property through a reaffirmation. Just personal property can be saved.

Debtors shouldn’t rush into a reaffirmation agreement. Debtors filed a Chapter 7 in the first place because they couldn’t pay their bills. The key idea behind a Chapter 7 is that a debtor gets a new start by eliminating their bills.

Reaffirming a debt means the debtor will be acquiring a new bill. Moreover, if a debt is reaffirmed the debtor must pay the bills. He or she cannot file another bankruptcy until many years after the first bankruptcy is discharged.

What if the debt is not paid?

If the debt on the reaffirmed item is not paid, it is likely that a creditor will repossess the item and report the failure to pay and the repossession to the credit scoring companies like Equifax and Experian. It is precisely because reaffirmation of a debt is dangerous that reaffirmation agreements must be approved by the US Federal Bankruptcy Judge assigned to the case.

There are some positive trade-offs though. Creditors may be willing to renegotiate the debt because repossessions and resales cost a lot of money too – money that the creditor is unlikely to get back from the debtor.

Debtors who get rid of most of their debts through a Chapter 7, to some extent, are considered better risks because they only have to pay the reaffirmed debt and not other bills. Here are a few of the common types of reaffirmation agreements.

Car loans:

Most people who buy a new or even a used car usually finance it. Part of the finance arrangement is that the buyer gives the finance company a security interest in the car.

The other part of the finance agreement is a deal to pay a certain sum each month until the loan is paid in full. People who reaffirm car loans agree to keep paying the monthly sum. Some creditors will agree that the arrears be paid on the back end.

This means the loan will be extended enough months to pay the arrears. Debtors can also offer to pay a little extra each month, for the original length of the loan, to pay off the arrears. Creditors, especially smaller ones, may even agree to lower the interest rate on the loan. There is no disadvantage in asking. The worst that will happen is the creditor will say no.

Some debtors pay off their original purchase car loan but then borrow against the vehicle because they need extra cash. The party giving the loan will also take a security interest in the car. These non-purchase loans can be easier to negotiate a new deal because the cars are older and not worth as much. Creditors of secondary loans often know cash in hand is better than a resale which may be hard and not yield much money.

Another way to argue for a renegotiation of a car loan is to check the guide books for car values. Many cars lose value as soon as they are driven off the dealer’s parking lot. As each year and each mile of usage goes by, the car continues to lose value. Since the value of the creditor’s security interest is only what the car can bring in if it is resold, debtors can argue that the loan should be paid only up to the real value of the automobile, truck or other personal vehicle.

Cars are the key possession people want to possess. Here are some other personal items to consider asking for reaffirmation agreements too. Many of the thoughts that apply to car loans apply to these personal items too.

Furniture, appliances and consumer electronics:

Most furniture and appliances aren’t worth too much. While it’s expensive to purchase these items, the resale values are minimal because the items get scratched, they start to need repairs and they are hard to move. Many creditors are usually happy to work out a deal because it’s just not worth the trouble to repossess these items.

Jewelry:

Debtors can often renegotiate loans for jewelry by showing that the jewelry’s value is minimal. A lot of jewelry is only worth money to the person holding it. Resale values are often low so the debtor can renegotiate the loan based on the low value.

Tools of the Trade:

These items can be important to a debtor because they help provide income. As with many other personal items though, they can lose value over time. Because creditors can only get the value of the item they repossess, renegotiations are possible.