Reaffirmation in Bankruptcy – Reaffirm Your Mortgage or Auto Loan

Apr 11, 2011
Asa Ghaffar

Reaffirming Your Mortgage - Image by lifeline92123

Secured liabilities, such as your mortgage or car loan, cannot be eliminated by filing Chapter 7. You need to reaffirm your debts in an external agreement.

Chapter 7 enables you to become free from debt in just four months. The main issue is that you can run into difficulties if you have secured debts, such as a home mortgage or car loan. This is because the terms of the bankruptcy agreement give a creditor the right to recover these assets from you.

Returning the item enables the creditor to clear some or all the outstanding debt. Once the creditor has recovered the collateral, the status is downgraded from a secured to unsecured debt. Should there be a deficiency, this can be eliminated by filing for bankruptcy under Chapter 7.

However, reaffirmation in bankruptcy may enable you to keep your automobile or primary residence. This is achieved by continuing to make the repayments externally to the bankruptcy agreement. Lenders prefer this approach because it enables them to recover a larger percentage of the debt.

When Should You Reaffirm Debt?

Decide which debts you want to reaffirm in a separate agreement. If there are any outstanding arrears, you'll need to discuss these with your bankruptcy attorney. You'll need to make an additional payment, on top of the regular repayment, over the remainder of the agreement.

Under section 341(a) of the Bankruptcy Abuse Prevention and Consumer Protection Act, your reaffirmation agreement form must be filed within 60 days of the first meeting of creditors. The court has the discretion to increase the amount of time that you have to file the agreement.

Your lawyer will need to file a form for each debt that you choose to reaffirm. If you don't have legal representation, you can acquire the forms and cover sheets from the bankruptcy court. Don't use a generic form, and always make sure that it has been accepted by the court.

When Is Reaffirmation Binding on Creditors?

Before a reaffirmation agreement is valid, it must be approved by the bankruptcy court. The agreement must include specific information, including an income and expenditure breakdown and a statement confirming that you're in a position to afford the monthly payments.

Once the agreement has been accepted by the court, a creditor cannot repossess your home or vehicle. Provided that you continue to make the repayments, this will remain the case. If you fail to pay on time, your creditors can go through the legal channels to recover their money.

Is it Advisable to Reaffirm Debt?

The benefit of reaffirmation in bankruptcy is that you can continue to live in your home or keep your car so that you can get to work. If you fail to maintain the repayments, you cannot eliminate a repossession deficiency because you can only file Chapter 7 once every eight years.

Provided that you make the repayments your life will be relatively unaffected, and you'll be able to build equity. Although Chapter 7 will show on your credit report for the next 10 years, making repayments on secured debt will help you to rebuild your credit history more quickly.