It depends, but yes. The likelihood of keeping your car in a Chapter 7 bankruptcy is affected by a number of different factors. However, the two most important factors are whether the asset is encumbered by a lien and if you are current on your monthly payments.
If there is no lien on the car, the question becomes whether the value of the car can be exempted. If there is a lien and you are current on monthly payments for the vehicle, the likelihood of keeping the car is high but a reaffirmation agreement would need to be agreed on. The remainder of this article touches on what these reaffirmation agreements are.
Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," allows debtors to discharge most of their debts and get a fresh financial start. This would mean that unsecured and secured debts are discharged. In the case of a secured debt, a discharge of the liability would mean that the creditor would have the right to repossess their collateral, such as a car. However, one unique aspect of Chapter 7 bankruptcy is the possibility of reaffirmation agreements. These agreements allow debtors to keep certain secured debts, like car loans, by promising to continue paying them despite the bankruptcy discharge.
What is a Reaffirmation Agreement? A reaffirmation agreement is a legal contract between a debtor and a creditor where the debtor agrees to repay all or part of a debt that could otherwise be discharged in bankruptcy. By signing this agreement, the debtor essentially renews their obligation to pay the debt and prevents the creditor from repossessing the collateral. Reaffirming a debt is a serious financial decision that should be discussed with your attorney.
Key Features of Reaffirmation Agreements:
Voluntary Nature: Reaffirmation agreements are entirely voluntary. Debtors are not obligated to enter into these agreements and can choose to discharge the debt instead. Only agree to reaffirm a debt if it is in your best interest. Be sure that you can afford payments that you agree to make.
Timeline: The agreement needs to be entered into before you receive your discharge. The signed agreement must be filed with the court no later than 60 days after the first date set for the meeting of creditors, so that the court will have time to schedule a hearing to approve the agreement if approval is required.
Legal Consequences: Once a reaffirmation agreement is approved, the debt is no longer dischargeable in bankruptcy. If the debtor fails to make the agreed-upon payments, the creditor can pursue collection actions, including repossession or foreclosure.
Right of Rescission: Debtors have the right to rescind (cancel) the reaffirmation agreement within 60 days after it is filed with the court or before the bankruptcy discharge, whichever is later.
Pros and Cons of Reaffirmation Agreements:
Pros:
Retention of Collateral: The primary advantage of a reaffirmation agreement is that it allows the debtor to retain the collateral securing the debt, such as a car, which can be crucial for maintaining stability and mobility.
Credit Score Impact: Continuing to make payments on a reaffirmed debt can positively impact the debtor's credit score, as it demonstrates a commitment to repaying debts.
Future Credit Opportunities: Successfully adhering to a reaffirmation agreement can improve the debtor's creditworthiness and provide better opportunities for obtaining future credit.
Cons:
Continued Financial Burden: Reaffirming a debt means that the debtor remains liable for the debt, which can be a significant financial burden, especially if their financial situation does not improve.
Risk of Repossession or Foreclosure: If the debtor fails to make the payments under the reaffirmation agreement, the creditor can take action to repossess or foreclose on the collateral, leading to potential loss of essential assets.
Limited Flexibility: Reaffirmation agreements limit the debtor's flexibility in managing their finances. If their circumstances change, they remain obligated to the reaffirmed debt, which could lead to financial hardship.
Conclusion. Reaffirmation agreements in Chapter 7 bankruptcy provide debtors with an option to retain important assets while continuing to meet their debt obligations. However, these agreements come with significant responsibilities and risks. Debtors should carefully consider their financial situation, the terms of the agreement, and potential long-term consequences before entering into a reaffirmation agreement. Consulting with a bankruptcy attorney can provide valuable guidance in making an informed decision that aligns with the debtor's financial goals and circumstances.
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