SECURED OBLIGATIONS IN BANKRUPTCY
Do I Still Owe Secured Debts (Mortgages, Car Loans) After Bankruptcy?
Yes and No
The term “secured debt” applies when you give the lender a mortgage, deed of trust or lien on property as collateral for a loan. The most common types of secured debts are home mortgages and car loans. The treatment of secured debts after bankruptcy can be confusing.Bankruptcy cancels your personal legal obligation to pay a debt, even a secured debt. This means the secured creditor can’t sue you after a bankruptcy to collect the money you owe.
Understand that your personal liability on the mortgage is now discharged, if you undertake to modify your loan or do a short sale post filing, you may lose this protection. Please call your lawyer before doing or signing anything with respect to your mortgage or car loan post filing. Work done related to this issue is excluded from your flat fee initial fee agreement.
But, and this is a big “but,” the creditor can still take back their collateral if you don’t pay the debt. For example, if you are behind on a car loan or home mortgage, the creditor can ask the bankruptcy court for permission to repossess your car or foreclose on the home. Or the creditor can just wait until your bankruptcy is over and then do so. Although a secured creditor can’t sue you if you don’t pay, that creditor can usually take back the collateral.
For this reason, if you want to keep property that is collateral for a secured debt, you will need to catch up on the payments and continue to make them during and after bankruptcy, keep any required insurance, and you may , although this is unlikely, have to reaffirm the loan.
What Is Reaffirmation?
Although you filed bankruptcy to cancel your debts, you have the option to sign a written agreement to “reaffirm” a debt. If you choose to reaffirm, you agree to be legally obligated to pay the debt despite bankruptcy. If you reaffirm, the debt is not canceled by bankruptcy. If you fall behind on a reaffirmed debt, you can get collection calls, be sued, and possibly have your pay attached or other property taken. Its is absolutely not necessary to reaffirm a home loan, and while technically necessary to retain a car/car loan, most lenders let you keep the property anyway as long as you stay current. For this reason it is often(almost always) a poor choice to sign a reaffirmation on a home or a car.
Reaffirming a debt is a serious matter.
You should never agree to a reaffirmation without a very good reason.
Do I Have to Reaffirm Any Debts?
Reaffirmation is always optional. It is not required by bankruptcy law or any other law. If a creditor tries to pressure you to reaffirm, remember you can always say no.
Can I Change My Mind After I Reaffirm a Debt?
You can cancel any reaffirmation agreement for sixty (60) days after it is filed with the court. You can also cancel at any time before your discharge order. To cancel a reaffirmation agreement, you must notify the creditor in writing. You do not have to give a reason. Once you have canceled, the creditor must return any payments you made on the agreement.Also, remember that a reaffirmation agreement has to be in writing, has to be signed by your lawyer or approved by the judge, and has to be made before your bankruptcy is over. Any other reaffirmation agreement is not valid.
Do I Have to Reaffirm on the Same Terms?
A reaffirmation is a new contract between you and the lender. You should try to get the creditor to agree to better terms such as a lower balance or interest rate. You can also try to negotiate a reduction in the amount you owe. The lender may refuse but it is always worth a try. You should also realize that if you modify a home loan, after filing bankruptcy, you are most likely making yourself liable for the loan where you were not personally liable beforehand, because of your bankruptcy.
Should I Reaffirm?
If you are thinking about reaffirming, the first question should always be whether you can afford the monthly payments. Reaffirming any debt means that you are agreeing to make the payments every month, and to face the consequences if you don’t. The short answer is no, you should not reaffirm.
If you have any doubts whether you can afford the payments, do not reaffirm. Caution is always a good idea when you are giving up your right to have a debt canceled. Before reaffirming, always consider your other options. For example, instead of reaffirming a car loan you can’t afford, can you get by with a less costly used car for a while?
Do I Have Other Options for Secured Debts?
You may be able to keep the collateral on a secured debt by paying the creditor in a lump sum the amount the item is worth rather than what you owe on the loan. This is your right under the bankruptcy law to “redeem” the collateral.
Redeeming collateral can save you hundreds of dollars. Since furniture, appliances and other household goods go down in value quickly once they are used, you may redeem them for a lot less than their original cost or what you owe on the account.
You may have another option if the creditor did not loan you the money to buy the collateral, like when a creditor takes a lien on household goods you already have. You may be able to ask the court to “avoid” this kind of lien. This will make the debt unsecured.
Do I Have to Reaffirm Car Loans, Home Mortgages?
If you are behind on a car loan or a home mortgage and you can afford to catch up, you can reaffirm and possibly keep your car or home. If the lender agrees to give you the time you need to get caught up on a default, this may be a good reason to reaffirm. But if you were having trouble staying current with your payments before bankruptcy and your situation has not improved, reaffirmation may be a mistake. The collateral is likely to be repossessed or foreclosed anyway after bankruptcy, because your obligation to make payments continues. If you have reaffirmed, you could then be required to pay the difference between what the collateral is sold for and what you owe.
If you are up to date on your loan, you may not need to reaffirm to keep your car or home. Some lenders will let you keep your property without signing a reaffirmation as long as you continue to make your payments. However, others will not. Please call us with any questions about how your particular lender treats these issues.
Reaffirming a debt is a very serious decision and should not be entered into lightly. We will forward you copies of any reaffirmation agreements we receive from your creditors. Normally, we will not sign reaffirmation agreements, as they go against everything bankruptcy is intended to do, namely, give you a fresh start. We may occasionally agree to support such an agreement on a case-by-case basis. This is not an included service, and there will be an additional fee charged for reaffirmation agreements. One negative consequence of not reaffirming is that the lender may not report your timely payments on your post filing bankruptcy credit report. Often after the case is closed they will voluntarily start reporting your good credit history.
If you decide to enter a reaffirmation agreement on your own, you will need to appear before the judge in your case to explain how you can afford to continue making the payments.