We had discussed in one of our earlier topic the difference between reaffirmation and surrender. A reaffirmation comes into picture when a debtor like to continue making the agreed payments and like to reaffirm the secured debts instead of surrendering the collateral and of course wiping out the deficiency. We know that most of the debtors have cars, and cars is a tool to continue your life and finding a job, and do other daily activities. If you file for Chapter 7 bankruptcy, the lender may require you to reaffirm your car loan in order to keep the car. Here’s why, and what happens if the reaffirmation agreement is, or is not, approved by the bankruptcy court.
Let us say you are behind on your car payments, the accrued payments has to be paid as they are not going to disappear. When you file bankruptcy, everything is stopped, and a secured creditors files motion to lift stay. Once the stay is granted, the secured creditors can move forward and start doing either collection or seize the collateral unless you confirm, or pay the accrued payments. The repo man can come back and haunt you once again unless you sign reaffirmation and continue making the agreed monthly payments.
When you are making payments on a car, your car note has two different parts — the promissory note that makes you personally liable for the debt and the security agreement that allows the lender to repossess the car if you default on the payments. To be enforceable, the security agreement must be registered with the DMV or other state registry — which results in a lien being placed on your car.
When you file Chapter 7 BK you can get rid of the promissory note (the amount you owe pursuant to the promissory note is discharged in the bankruptcy) — and your personal liability — but you can’t get rid of the lien. This lien stays and now you need to reaffirm it to continue possession of the car. This means you will have to continue making your payments if you want to keep the car, even though you don’t actually owe anything on it.
You May Need Reaffirmation Agreements ?
Well, since you had decided to keep the car, then you should pay. First, it is the agreement you had accepted. Second, if you surrender, it would be very expensive to find someone who would lease or sell you car unless you agree an exuberant rate of interests. At least when you doing reaffirmation, you are telling the bankruptcy court that you are willing and financial viable to continue making the monthly payments. If it is not reaffirmed, the lender cannot come after you for deficiency judgment.
The reaffirmation is a complex set of paperwork, and if the lender requires you to reaffirm, you’ll have to sign an agreement the lender will send you, and file the agreement with the court. The court will give you a date for a court hearing at which the judge will decide whether you can afford to make the car payments.
What If The Judge Doesn’t Approve the Reaffirmation?
If the judge decides you can’t make the car payments, the judge will disapprove the reaffirmation agreement and you’ll be off the hook. But what if you remain current on the payments, even though there is no reaffirmation agreement? In this case, you can keep the car. A reaffirmation should be signed with great care because it has lots of implications.
Few Words of Caution:
On the plus side, reaffirming a secured debt gives you a degree of certainty – you are once again in a contractual relationship with your creditor and knows how much to pay every month. You know how much you are supposed to pay each month and you know the payoff balance, interest rate and terms of the agreement. All these things are clearly defined in an understandable way.Sometimes, you may be able to negotiate a more favorable deal when you reaffirm. Other than cars, secured creditors are often not set up to liquidate used merchandise and since you already have possession of the property (collateral), many lenders are happy to negotiate more favorable terms with you so they can avoid the hassle of recovering and disposing of property. The Car negotiations option is less true with motor vehicles, because there is an active used car market. Negotiation option can work well when you are dealing with furniture or electronics.