Bankruptcy gives you a temporary shelter from creditors, as well as collection calls, judgments and lawsuits. In a chapter 7 bankruptcy, the trustee can seize your property and sell it to pay debts. However, all debtors are allowed to keep a certain amount of assets, which are exempt from seizure. At the end of the bankruptcy process, the law allows a discharge, or cancellation, of your debts, with some exceptions. If you want to keep personal property that isn't exempt from liquidation, you can sign a reaffirmation agreement. Reaffirmations can help you keep a car or other personal property, as long as you follow the rules.
Why You Might Reaffirm
After you file for bankruptcy protection, the court puts a hold on any collections or seizures of your property. It's a temporary "stay," which doesn't permanently protect all your property, however. A creditor with a secured loan still has the right to the collateral, such as a car or a house, as long as the property is not exempt under bankruptcy law. Exempt property, depending on whether you use state or federal exemptions, may include your retirement savings accounts, life insurance contracts, Social Security benefits and a limited amount of equity in your car or home. A reaffirmation agreement, which is available only for secured property, affirms that you intend keep up on a loan during and after the bankruptcy. Reaffirmation would not apply in a chapter 13, which involves a repayment plan, as this type of bankruptcy does not allow the seizure of your property.
In a bankruptcy case, creditors have the right to object to the court's treatment of their loans. After you file for chapter 7, the trustee holds a 341 meeting where your creditors can meet with you to discuss your case. After this meeting takes place, the law sets a deadline of 60 days for a creditor to file any reaffirmation agreements. All parties, including the debtor, creditor and court, must agree to the reaffirmation. If the court allows the reaffirmation, you must keep up the payments per the agreement, or lose the collateral if the debt is secured.
Failure to Reaffirm a Loan
The debtor must work out any reaffirmation with the creditor. While a creditor isn't forced to accept an agreement, in most cases, the creditor would favor a reaffirmation over repossession or foreclosure. If the creditor misses the 60-day deadline, it would have to file a motion with the court to waive the deadline, as well as provide grounds for doing so. If no signed reaffirmation is filed, then the bankruptcy rules prevail -- and the creditor has the right to repossess collateral, as long as it's non-exempt property. If the court discharges the debt, then you can keep your property and no longer need to make payments.
Certain loans provide favorable scenarios for reaffirmation agreements. For example, you may decide to sign a reaffirmation agreement because you are well on your way to paying off a car loan and need to keep your vehicle. Further, reaffirming a home loan could help you keep a roof over your head. However, keep in mind that if you fall behind on payments, the lender still has the right to foreclose. Since credit card loans are unsecured, there's little point in reaffirming them; most card issuers will simply cancel the account. The court will discharge other unsecured loans as well, but not certain debts such as recent federal and state taxes, child support and federally guaranteed student loans. These liabilities are protected by law and don't need reaffirmations.