A 12-part Series On All You Need To Know About The Process of Filing for Chapter 7 Bankruptcy
Part Five – Secured Assets and Reaffirmation Agreements
When a debtor files bankruptcy the petition that is filed will list all assets. Some of those assets may be secured. Typically, these assets have no value because what is owed is more than what the asset is worth. Take a new car for example. When a car is purchased and is financed the amount that must be paid is typically more than what the car is worth as soon as the car is driven off the lot…. Because the car decreases in value as time and use take their toll.
What is a Secured Asset?
An asset is secured when the asset was purchased through a secured loan. When taking out a secured loan, the debtor agrees the purchased asset will be collateral, creating a voluntary "lien." The lien lets the creditor recover the property if you don't pay.
What happens when I file Bankruptcy with a secured asset?
When a debtor files for bankruptcy with a secured asset one of three things is likely to happen.
1. The asset is forfeited to the creditor and the deficiency is discharged in bankruptcy.
2. The debtor makes an informal agreement to continue payments and the bankruptcy proceeds just as normal. If you stop paying the creditor will seize the car but the deficiency will still be discharged. This happens when there is very little left to pay, and a reaffirmation agreement is unnecessary.
3. The debtor and the creditor enter into a reaffirmation agreement.
What is a reaffirmation agreement?
A reaffirmation agreement occurs when a debtor voluntarily reaffirms a dischargeable debt. This means the contract remains enforceable. An agreement to reaffirm a debt otherwise dischargeable in bankruptcy is enforceable only if all conditions set forth in 11 USC § 524 are met. These requirements are intended to protect debtors from compromising their “fresh start” by making unwise agreements to repay dischargeable debts.
First, the reaffirmation agreement must be done with the consent of the creditor. Second, the reaffirmation agreement must be made before a discharge is granted. Third, the reaffirmation agreement must be enforceable under applicable non-bankruptcy contract law. Finally, there must be a written reaffirmation agreement.
If a reaffirmation agreement is filed a hearing may be set to make sure the reaffirmation will not be an undue hardship on the debtor. If the debtor has an attorney, an attorney certification can be signed which informs the bankruptcy court that the debtor is fully informed and the reaffirmation is voluntary, that the reaffirmation does not impose an undue hardship, and the attorney fully advised the debtor of the reaffirmation agreement legal effect. This usually does the trick, and a hearing is not set. If there is no attorney certification, a hearing WILL be set so the Court can make sure that the reaffirmation is voluntary, that the debtor is informed, and that it will not be an undue hardship.
The good news is a debtor may rescind a reaffirmation agreement at any time prior to discharge or 60 days after filing, whichever is later. Once that time passes the reaffirmation agreement is in full effect. This means if the debtor defaults on the agreement the collateral is taken, and they are on the hook for the deficiency.