You've hit a rough patch and you're considering filing for bankruptcy. You're worried about losing your house or your car, but you've heard about something called affirmation that may let you avoid that. It's actually called "reaffirmation," and yes, you may be able to keep your property that way, but there are risks involved. You may not even need to do it. This is one case when it's smart to check things out with an attorney before you take any action.
When you receive a Chapter 7 bankruptcy discharge, most of your debts go away, including credit card debts, mortgage, even your car note. The catch is, if you have secured debt, bankruptcy only eliminates your obligation to pay. Your creditors still have the right to seize the property in most circumstances. By reaffirming a debt, it's removed from the discharge, which means you are still obliged to keep making payments. Reaffirmation doesn't apply to Chapter 13 bankruptcy, which restructures your debts rather than wiping them out.
How Reaffirmation Works
It's pretty obvious why someone might consider reaffirming a debt for a house or a car during a Chapter 7 bankruptcy. Nobody wants to lose a home or a set of wheels. By reaffirming a debt for, say, your house or your car, you make an agreement with your creditor to continue making payments in exchange for keeping your house or your car. However, you have to be current in your payments when you make the offer to reaffirm, or the bankruptcy trustee will probably nix the idea.
Dangers of Reaffirmation
The big problem with reaffirmation is that if you fall behind on your payments, the creditor can seize your house or your car, just like before you filed for bankruptcy. However, once you file Chapter 7 bankruptcy, you can't file again for eight years. That means that your mortgage lender could put you on the street, or the car dealer could repossess your ride, and you would still be on the hook financially until you paid off the debt. You may even have your wages garnished if the creditor decides to sue.
Here's the deal. You may not need to reaffirm your house payment or car note, even if you want to keep your house or car. All states allow you to keep some of your property even in a Chapter 7 bankruptcy by declaring an exemption. The amount of the exemption varies from state to state. But if you don't have a lot of equity in your house or your car isn't worth that much, your state's exemption may be large enough to allow you to include one or both as part of your exempted property, although you have to keep up your payments after your bankruptcy is discharged. Even if you can't include a house or a car in your exemption, the trustee probably won't seize your property if selling it won't produce enough cash to pay what you owe to that creditor.
- The Free Legal Dictionary: Bankruptcy
- Bankrate.com: 12 Myths About Bankruptcy
- Nolo: The Foreclosure Survival Guide -- Using Chapter 7 Bankruptcy to Keep Your House
- Nolo: Your Home in Chapter 7 Bankruptcy
- Nolo: How to File Bankruptcy Without Losing a Car
- Nolo: Your Car in Chapter 7 Bankruptcy -- an Overview of Your Options
- Nolo: Will the Chapter 7 Trustee Agree to My Reaffirmation Agreement?
- Bankruptcy Law Network: Affirm or Reaffirm After Bankruptcy, It’s Trouble Whatever It’s Called
Chris Blank is an independent writer and research consultant with more than 20 years' experience. Blank specializes in social policy analysis, current events, popular culture and travel. His work has appeared both online and in print publications. He holds a Master of Arts in sociology and a Juris Doctor.