Secured Debts in Bankruptcy
If you wish to Surrender the Collateral:
Vehicles: You are no longer obligated to make the monthly payment, however, you must make arrangements with the lender to surrender the collateral within 45 days after the filing of your bankruptcy petition. You will not be responsible for a deficiency balance.
Mortgages: You are no longer obligated to make the monthly payment if you do not intend to retain your home. The lender will eventually proceed with a foreclosure. You will not be responsible for any deficiency balance after filing bankruptcy even if the foreclosure process occurs several months, even years, after you file.
If you wish to Retain the Collateral:
You must continue to make payments on all “secured‟ debts if you intend to retain collateral such as a car or a house. When you file bankruptcy, all of your secured debts are listed in your petition as a required by law.
Mortgages: You are not required to sign a reaffirmation agreement on a mortgage loan and we advise against doing so. You may continue making payments on a mortgage loan without signing a reaffirmation agreement.
Vehicles: Most lenders will allow you to retain the vehicle without signing a reaffirmation agreement so long as you stay current on the loan. Contact your lender before filing bankruptcy to find out what their policy is on reaffirmation agreement.
How to get a reaffirmation agreement:
If you wish to reaffirm any loan, please contact your lender as soon as possible after filing bankruptcy to request a reaffirmation agreement. You have just 45 days after your meeting of creditors to return the reaffirmation agreement to the lender.
Are there benefits to signing a reaffirmation agreement?
Mortgages: There are two benefits you may want to consider. If you do not sign a reaffirmation agreement, the mortgage account will be reported as “discharged” in a chapter 7 bankruptcy even if you keep the loan current after filing bankruptcy. Most lenders will only report timely payments if the debtor signs a reaffirmation agreement. Another potential benefit is the ability to obtain a loan modification or refinance in the future. Many lenders are refusing to refinance loans unless a reaffirmation agreement was signed.
Auto Loans: Very few lenders (e.g. Ford Motor Credit) require the debtor to sign a reaffirmation agreement in order to retain the collateral. Even if it is not required, you may consider filing a reaffirmation agreement because it helps to rebuild credit.
Consequences of signing a reaffirmation
If you sign a reaffirmation agreement you will be personally responsible for repaying the loan after your bankruptcy discharge. You will not be able to file another chapter 7 for eight years. In the event of default, the lender will seek a deficiency judgment if the value of the collateral is insufficient to cover the amount of the loan. You could have your wages and bank accounts garnished.
Instructions for signing a reaffirmation agreement: If we receive a reaffirmation agreement, we will help you complete it and we will sign the agreement so that you can avoid a court hearing. I am the only bankruptcy lawyer in Colorado who provides this service. Other firms do not assist in completing the agreement nor do they sign or certify the agreement.
If you execute a reaffirmation agreement and the attorney does not sign it, you will need to attend a Bankruptcy Court hearing either in person or over the phone. During the hearing a bankruptcy judge will determine whether the agreement poses an undue hardship on you. If the agreement poses an undue hardship, the Court will not approve the agreement.
If your attorney does not assist you in completing the forms, you will need to complete several sections of the reaffirmation agreement completely and accurately or the Court will not consider the agreement.