If you have a vehicle loan, a mortgage, a boat loan, or any other secured loan, then you will need to decide whether you want to reaffirm the loan, by signing a Reaffirmation Agreement. This is a 10 page form that the lender prepares, then I add your bankruptcy numbers to it and sign, then you sign and return it to the lender, then the lender signs and files it with the court.
How Secured Loans Work
Every secured loan has two parts to it: 1) Security, in the form of your vehicle, home, boat, etc., and 2) Your Personal Obligation to pay back the amount borrowed when you got the secured loan.
A bankruptcy case does NOT (normally) get rid of the 1) Security part of the loan. The lender can still repossess or foreclose if the borrowed amount is not repaid on time and in full.
However, a bankruptcy case WILL (almost always) get rid of 2) Your Personal Obligation to pay back the loan. The lender will NOT be able to pursue you for any deficiency balance after repossession or foreclosure, to pay back any amounts that the sale of the security did not cover.
A Reaffirmation Agreement WILL, however, keep you responsible for Your Personal Obligation on the reaffirmed loan, despite your discharge in your bankruptcy case.
Credit Report Considerations
Your bankruptcy discharge will keep your lender from reporting anything further about your payments, good or bad, on your credit report. A Reaffirmation Agreement WILL, however, allow the lender to keep reporting everything about your payments, good or bad, for many years to come.
If you know you will be making the payments on a particular loan, the good credit reporting can be of some, although usually small, benefit. However, if you have ANY doubts about making the payments, the cost of keeping Your Personal Obligation could be huge – you may be saddled with an unpayable debt that you can’t get rid of in another bankruptcy case for 7 or 8 years.
Note that the Statement of Intention in your bankruptcy petition is NOT binding. Even if the initial intention is to reaffirm a debt, that does not mean that you have to actually do so, or sign the reaffirmation agreement. It's rather common for people to have second thoughts about staying personally liable for a secured loan.
If you do NOT reaffirm a vehicle loan, within the 45 days after the trustee meeting, the lender CAN repossess the vehicle, even if you are current on the payments.
However, it is rare for a vehicle lender to repossess a vehicle, if you are current on your payments at the filing of your case, and you STAY CURRENT. They don’t want the vehicle; they want their payments. See “HOW TO PAY for the Things You Want to Keep” in my When Do I Stop Paying article on my website.
The EXCEPTION is a vehicle loan with Ford Motor Credit. If your vehicle is financed with them, MAKE SURE to discuss that with me. They might repossess even though the loan balance far exceeds the value of the vehicle. The good news is that if they do, you are instantly richer by the amount of that negative equity.
If your interest rate is over 10%, you probably should NOT reaffirm the loan. If your loan balance is much higher than the value of your car, you should probably NOT reaffirm the loan. If you are at all likely to have trouble paying back the loan, you should probably NOT reaffirm the loan.
On the other hand, if you have a low interest rate, and the vehicle is worth more than the loan balance, you are confident that you can make the payments, and you like the vehicle, then it might be worth reaffirming the loan, for the good credit reporting and the assurance that the lender won’t repossess.
Unless you will be walking away from the home, most first mortgages (deeds of trust) can be safely reaffirmed. California state law largely prohibits a lender from getting a deficiency judgment on a foreclosed first mortgage. So the risk is minimal; the benefit (although also rather small) of having your continued payments reflected on your credit reports, may make it worth reaffirming the loan. However, see the Life After Bankruptcy article on how to rebuild your credit, with or without any reaffirmed loan.
Second mortgages could also be reaffirmed, UNLESS the total of the two balances of the first and second mortgages, added together, is more than the current value of the house. In that case, you should not risk the possibility of the second mortgage pursuing you if the first forecloses, especially if the 2nd was not used to purchase the home.
A lender can NOT foreclose on a home for the mere failure to reaffirm any loan, like they can repossess a vehicle for the failure to reaffirm a vehicle loan.
A lender CAN repossess ANY personal property, such as cars, boats, quads, furniture, jewelry, etc., for the failure to reaffirm the loan.
However, of the above list, only cars (and SUVs, trucks, RVs, etc.) are usually kept outside and accessible for repossession, at some point during the day.
Everything else is usually kept inside, either in some type of storage, or in your house. NO ONE, except the local sheriff, pursuant to a state court order, can come INSIDE your storage space or home to repossess items.
A lender almost NEVER wants to pay court costs, sheriff costs, and sale costs to get your used stuff. So you generally don’t need to reaffirm (and possibly not pay anything more for) this other stuff.
Getting a Reaffirmation Agreement, Approval
1. IF you want to reaffirm a loan, you must get your lender to send me a reaffirmation agreement. While it is possible for anyone to prepare such an agreement, the lender is only likely to sign one where they have produced the loan terms for the agreement. So the agreement must come from them.
2. You must ALSO make it clear, to me, that you actually want to affirm a particular loan. Again, don't just go by the Statement of Intention in the petition. Lenders very often send out agreements, but most of the time it is not in your best interest to reaffirm any of your loans.
3. For a vehicle loan, you must actually PAY the loan, and stay current on ALL the payments, until the loan is completely PAID IN FULL. Otherwise the lender will repossess anyway, and then get a deficiency judgment against you, since the reaffirmation agreement removes your bankruptcy protection.
4. Further, if the court sets a hearing to confirm the reaffirmation agreement, you MUST attend that hearing. The court wants to know if YOU think you can make the payments, not whether your attorney thinks you can.
MAKE SURE TO STAY CURRENT ON ANY REAFFIRMED LOAN!!!
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