Two of the most common bankruptcy myths lead people to believe that you will lose everything you own and you will never be able to own anything in the future. Both of these are false. Most people who file bankruptcy don’t lose anything and in the future you can buy, own and possess whatever you can afford to make payments on. One of those necessary and often treasured possessions debtors fear losing is their vehicle – their mode of transportation.
Chapter 7 and Chapter 13 handle debts differently. In a Chapter 13 you can include the debt on your vehicle in your repayment plan. A Chapter 7 does this a little differently, so we will focus on this chapter in this blog.
The Chapter 7 Bankruptcy Discharge & Reaffirmation
A Chapter 7 bankruptcy discharge eliminates your responsibility to pay on your secured debt. However, if you have secured debt your creditors retain the right to repossess the property your debt was secured against. Let’s back up a minute and review what secured debt is and how it differs from unsecured debt.
Secured debts are those secured by collateral. Your creditors have the right to reclaim the collateral if you fail make payments. Common secured debts include vehicles and mortgages.
Unsecured debts are those you committed to pay verbally or in writing, such as credit card debt.
For example, if you have debt on your vehicle, your creditors can take back your vehicle if you stop making payments – whether that is through bankruptcy or other means.
Under a Chapter 7 you can reaffirm your debt before a bankruptcy discharge is entered, which means you will continue to repay a certain debt that would typically be discharged. Essentially you are excluding the debt from your bankruptcy. A reaffirmation agreement must be signed and submitted to the court before your petition finalized and your debts discharged. You must also:
- Disclose the amount of the debt and how it was calculated
- File a statement of your current income and expenses, proving you have sufficient funds to make payments on the reaffirmed debt
Benefits & Stipulations of Reaffirmed Debt
The largest benefit of reaffirmation allows you to keep your property or collateral; the opposing disadvantage is that you remain in debt after bankruptcy. The costs and benefits must be carefully weighed when considering reaffirmation. NOLO advises considering reaffirmation only in the following circumstances:
- Your creditor insists.
- You must retain possession of a certain property or collateral.
- You are able to make current and full payments to pay off the entire balance.
- Your property or collateral is worth significantly more than you owe (AND you are able to keep up with the payments to pay off the remaining balance).
Your creditor must also agree to the terms of the reaffirmation. You can attempt to lower your debt through reaffirmation, but because creditors need to agree and sign, this can be difficult. If you can provide a benefit to your creditor, such as offering to pay off the reduced amount in a significantly shorter amount of time, you may be able to increase the likelihood of them accepting your reaffirmation terms.
You MUST be able to make payments until you pay off the balance. If you are unable to do so your creditors can, and will, repossess your property, sell it and charge you for the difference between what you owe and what they were able to sell it for. You will not only have lost your property, but you will still owe money on it.
Learn more about a Chapter 7 bankruptcy and your other bankruptcy options by downloading our free Debt Solutions 101 ebook. If you think bankruptcy may be right for you, or wish to discuss your options with a legal professional, request a consultation.