Do you have to reaffirm on a car loan to keep a car after a Chapter 7 bankruptcy? What does it mean to reaffirm a debt?

Edrie Pfeiffer
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Edrie Pfeiffer, Bankruptcy & Divorce Attorney

When you file a Chapter 7 bankruptcy, you are required to tell secured creditors, like car loans, what your intention is regarding the debt. This is done by filing a Statement of Intent and mailing a copy to the secured creditors. You basically have three choices:

1) you can surrender the car, which means you give it back to the creditor

2) you can reaffirm the car, which means you pay the creditor the current market value for the car

3) you indicate that you want to reaffirm the debt.

Reaffirming a secured debt means that you are willing to sign an agreement to pay the full amount of the debt after you receive your bankruptcy discharge. If you chose this option, you are un-doing the effect of the bankruptcy discharge and
you will be obligated to pay the loan on this debt as if the bankruptcy never happened.

After receiving a copy of the Statement of Intention, the lender will normally prepare a proposed reaffirmation agreement and send it to our office. To properly reaffirm a debt you and the lender must:
1) Sign a formal reaffirmation agreement which sets forth the terms of your agreement:
2) File the agreement with the Bankruptcy Court before your discharge is entered;

If your monthly income is greater than the expenses you listed on bankruptcy, the court may approve the agreement. However, if your monthly income is less than the expenses shown on your bankruptcy, you will need to explain to a Judge how you can make these payments. Our attorneys normally do not sign Reaffirmation Agreements, especially if your expenses are greater than your income. The Court will hold a hearing to consider approval of the reaffirmation agreement and you will have to appear to explain how you will be able to make the payments. If the Judge is satisfied, the agreement will be entered. If the Judge thinks the agreement is a financial burden, the agreement will not be entered.

The Judge may also find that you have done all you were required to do but that he feels the Reaffirmation Agreement should not be entered. This will allow you to keep your secured items as long as you keep your payments current. However, if you change your mind or fall behind on the payments and the creditor takes the collateral, you will not be personally obligated to pay any remaining balance. This option is not available if the lender is a Credit Union. If the lender is a Credit Union, the Court has to enter the Reaffirmation Agreement.