One of the most common questions I get from clients involved in bankruptcy is how the bankruptcy will affect their mortgage or car loan. When a creditor has a lien on any of your property, you have several options to retain and keep the property or get the fresh start by "surrendering" the property to the bank or lienholder. When it comes to most secured loans and liens in bankruptcy, you have the option to:
1) Reaffirm the debt (renew legal obligation to keep it and pay for it)
2) Surrender (discharge the debt and allow the lienholder to take possession)
3) Redeem (pay off the loan at current market value and extinguish lien)
4) Retain and pay (keep and pay but no obligation)
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Most people choose to sign a "reaffirmation agreement." Reaffirmation, in most cases, simply means electing to keep your secured item (car, house, other collateral) usually at contract terms and continue to pay as normal, with the debt and obligation to pay that debt surviving the bankruptcy. In some cases, if it is in your best interest, the bankruptcy lawyer will negotiate with the creditor to alter the terms for the reaffirmation agreement to get you a better deal.
Not all creditors, however, will sign a reaffirmation agreement, which means that your option will either be to keep paying and abide by the terms of the original contract or surrender the property back to the creditor in satisfaction of the lien and your obligation on the debt being discharged in the bankruptcy. This option, known as the "ride-through," is disfavored by many creditors because if you stop paying on it sometime after the bankruptcy discharge is rendered, the creditor will be limited only to the remedy of repossessing the collateral (which may have little value) as the debtor's personal liability on the debt is extinguished in the bankruptcy.
Chapter 7 bankruptcy requires that for all secured collateral owned by the person filing bankruptcy (the "debtor") a "Statement of Intent" as to each secured item must be filed. This statement gives notice to the lienholder(s) of the debtor's intent to either reaffirm the debt, surrender it back or to redeem the collateral. The ride-through option discussed above is not an option on the Statement of Intent, as it is an unofficial understanding between the creditor and debtor.
Signing a reaffirmation agreement basically "locks" you in to the new terms, so if you were to default on the loan during or after your bankruptcy is concluded, the creditor has the remedy at law to sue you and/or repossess the collateral; therefore, it is EXTREMELY IMPORTANT that you consider your willingness and ability to reaffirm a debt when you're in bankruptcy. Bankruptcy for many is about getting a fresh start so if you want to keep a secured debt and you have the budget for it, consider your options wisely. A licensed attorney who practices bankruptcy law in your state should afford you with your options to make an informed decision.
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