What is a reaffirmation agreement and how can it help me keep my car?

What is a reaffirmation agreement and how can it help me keep my car?

The big difference between a Chapter 7 Bankruptcy, and a Chapter 13 Bankruptcy is that in a Chapter 7 Bankruptcy, the debtor’s estate is “liquidated”.  That is, everything is sold off, and distributed to the debtor’s creditors.  This might be thought of as a disadvantage but, don’t get scared if you’re considering Chapter 7 bankruptcy because there are exemptions that cover your personal property which often allow you to keep your stuff. Property like furniture, clothing, and electronics are rarely seized by the bankruptcy trustee. Chapter 7 is a “liquidation”, but in practicality, nothing is usually liquidated.

But sometimes a debtor does have property that is not covered by the exemptions.  They might have a secured loan on a car or a house that has more equity than the exemptions will allow; and yet, the debtor does not want to lose that property.  I find this to be most common with Chapter 7 debtors who want to keep a car that is not covered by the exemptions.  If the debtor were to enter bankruptcy, the trustee could sell the car and use the proceeds to pay the debtor’s creditors.

Fortunately, you do not have to do this if you don’t want to.  You may have the option to “reaffirm” your car loan.  The practical effect of reaffirming the car loan is to have the car and the creditor shielded from the bankruptcy proceeding, as if it didn’t affect them at all.  Your other debts will be liquidated and you’ll receive a discharge as to everything except the car (and your other non-dischargeable debts, as I’ve previously explained).  Your reaffirmation agreement might contain the same terms, payment, and interest rate as your original loan, or it might be different.  It may be possible to negotiate lower payments, or a better interest rate, etc.

Note well, however, there are certain guidelines that must be followed in order for you to execute a reaffirmation agreement.  Because the effect of the reaffirmation agreement is to render your creditor immune to your bankruptcy, and force to you continue repaying that debt, the Bankruptcy Court must be assured that this is a wise choice for you.  Together with your bankruptcy lawyer and your creditor you must convince the court of a few a things: that you will be able to make the new payments without an undue hardship, and that you were not coerced into entering a reaffirmation agreement without understanding what you were getting yourself into.

So, if you want to do this, you and your Salt Lake City Bankruptcy attorney will have to negotiate a reaffirmation agreement with your creditor together.  And before the court approves the agreement, the Bankruptcy judge will want to make sure that your Salt Lake City bankruptcy attorney explained all of your rights and the consequences of entering such an agreement to you.

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