A Chapter 7 bankruptcy filing allows a debtor to discharge most of their debt, including secured debt if the debtor is planning to surrender the property securing the debt.
However, many debtors do not want to surrender their homes or their cars. In those cases, the debtor must consider reaffirmation of the debt.
For real property loans (houses, condos), reaffirmation is not required by the bankruptcy code, but it is allowed. A debtor can choose to discharge their home loan(s) and continue to make payments on the debt voluntarily. The reason to make the payments voluntarily is to avoid foreclosure because the discharge of the debt as to the debtor does not remove the secured interest the lender has in the property. A real property lender can foreclose on secured property even if the debt has been discharged unless the loan is current. Generally, the only advantage to reaffirming a real property loan in Chapter 7 is to improve your credit score a little sooner because lenders may not report the payments the same way for a discharged debt as they would for a reaffirmed debt. It is almost never a good idea to reaffirm a second mortgage or Home Equity loan because that puts the debtor on the hook for the full loan balance and severely weakens the effect of the bankruptcy discharge.
For personal property loans (cars, trucks, motorcycles), the bankruptcy code does require a reaffirmation of the loan if the debtor wants to keep the property. If a debtor attempts to discharge the debt and just make voluntary payments to avoid repossession, it may not work. Some lenders will repossess a vehicle if it is not reaffirmed in bankruptcy even when the payments are current. If a debtor wants to keep their vehicle and is confident they can maintain the monthly payments, it is usually best to reaffirm the loan, which ensures the vehicle will not be repossessed as long as the payments are current. It also makes sure that the credit report will reflect the payments the debtor makes on the loan.
When considering filing bankruptcy, it is wise to consult with an attorney prior to filing to make sure you make good decisions with respect to reaffirmation of loans and effective use of the bankruptcy discharge.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.