How To Get a Reaffirmation Agreement in Chapter 7 Bankruptcy

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In a Nutshell

To keep your car during and after a Chapter 7 bankruptcy, you sometimes need to sign a reaffirmation agreement with the lender and have it approved by the bankruptcy court. This agreement is a contract that confirms you're committed to continue paying your car loan after bankruptcy. It comes with a risk: If you fall behind on your car payments after your bankruptcy, your car may be repossessed and you may be left to pay a deficiency balance.

Filing Chapter 7 bankruptcy can help you deal with overwhelming debt. It can wipe out credit card debts, medical bills, payday loans, and other debts not tied to property. Debt that’s tied to property is treated differently in bankruptcy. In some cases, bankruptcy filers don’t want to get rid of this debt because it means they also have to give up the property. For example, if you have a car that’s financed by an auto loan, you may want to keep it despite filing bankruptcy. This is where reaffirmation agreements come in.

In this article, we’ll cover what reaffirmation agreements are and how they work in Chapter 7 bankruptcy cases.

What Is a Reaffirmation Agreement?

Typically, reaffirmation agreements in Chapter 7 cases are for a car. When you got your original car loan, you entered into a contract with the lender agreeing to make a certain monthly payment and abide by other terms. A reaffirmation agreement is also a contract between you and the lender. It’s a special agreement you can make with your lender during bankruptcy to reaffirm your commitment to the loan. Essentially, you’re agreeing that you’ll remain responsible for the debt and you’ll keep paying on the loan during and after the bankruptcy. In exchange, you get to keep the car.

Some lenders require you to sign a reaffirmation agreement if you want to keep your car after bankruptcy. Other lenders allow you to keep your car as long as you continue to make the payments, even if you don’t sign a reaffirmation agreement.

The lender gets a say in what you do with your car because car loans are secured debts. The car is collateral for the loan, and the car loan gives the lender a security interest in the car. This gives them the legal right to repossess the car if you default on the loan. Whether you sign a reaffirmation agreement or not, you must still pay the debt if you want to keep the collateral.This is true even after filing bankruptcy.

How Do Reaffirmation Agreements Work?

You can only enter into a reaffirmation agreement if you’re current on your car payments and the equity you have in the car is fully protected by exemptions. As a reminder: Equity is the car’s current market value minus what you owe on it and exemptions are laws that allow you to protect up to a certain amount of different kinds of property during your bankruptcy case. Exemption laws vary by state. Also important to keep in mind is that reaffirmation agreements are voluntary. The creditor can’t force you into one.

If you wish to reaffirm a debt, you’ll need to follow a few steps. First, let the court know. You can indicate that you want to reaffirm a debt on your Statement of Intention form. Then you also need to mail a copy of this form to the lender and ask them to draft a reaffirmation agreement and send it to you. You’ll need to read and sign the agreement and fill out any required information to demonstrate you can afford to keep making payments. Finally, send the agreement back to the lender within 45 days of your meeting of creditors.

The lender will then file the agreement with the bankruptcy court. Your agreement has to be approved by the court. The bankruptcy judge may deny the agreement if:

Filing bankruptcy is a chance to get a fresh start financially. When the judge reviews your case and the reaffirmation agreement, they’ll want to be sure it’s in your best financial interest. They look at your post-bankruptcy budget (which you lay out in Schedules I and J) to make sure you can easily make the loan payments. If not, they may deny the agreement. That doesn’t mean you have to go without a car, though. It may be better for you to surrender the car and purchase another one that fits within your budget.