Spotlight on reaffirmation agreements
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When you file Chapter 7 bankruptcy, the intention is to get out of debt. Most unsecured debt can be discharged in Chapter 7 (so long as you qualify for this chapter). This includes credit cards, medical bills, past-due utility balances, and unsecured loans such as signature loans. But secured debt is another consideration in Chapter 7, and reaffirmation agreements apply to this type of debt.
What is a reaffirmation agreement?
Simply, it is a document that reaffirms a debt that could otherwise by wiped out in bankruptcy. For instance, if you have a car loan, the debt can be discharged in Chapter 7. However, if you are current on your car note or can work out a payment arrangement for past due balances to keep the vehicle, you can retain it after Chapter 7.
With a mortgage, if you are current, and your equity does not exceed your North Carolina bankruptcy exemptions, you can also keep your property. However, some secured creditors may request a reaffirmation agreement that confirms that you did not include the secured debt in the bankruptcy petition.
How secured debt differs from unsecured in bankruptcy
If you include secured debt in the bankruptcy, you can surrender the property. If you are behind on your payments and don’t want to keep the property, such as your home or car, you can give up both the debt and the property. For instance, if your vehicle is in poor condition or non-operational, you may want to let the lender take it and shed the debt as part of your Chapter 7.
Similarly, if you have no equity in your home, or you have negative equity (known as being upside down), you may want to walk away from the house to get a clean slate on a property that’s not worth the mortgage payment. Unsecured debts, however, that are eligible must all be wrapped up in the petition. You can’t decide to keep a certain credit card or medical bill.
All the unsecured creditors fall into the same pot – secured debt, though, can be carved out of a Chapter 7 bankruptcy via a reaffirmation agreement.
Should you sign a reaffirmation agreement?
Even if you don’t sign a reaffirmation agreement, so long as your payments are current, you should be able to keep your home or auto. However, some lenders will push for you to sign one. The downside of a reaffirmation agreement is that it excludes it from your bankruptcy petition.
If you later fall behind on payments, you can be foreclosed on or subject to repossession, and you won’t have the option of bankruptcy protection because you can’t go back and include the debt in your Chapter 7. Most bankruptcy attorneys do not recommend that their clients sign reaffirmation agreements if it can be avoided.
If a reaffirmation agreement is executed, it essentially reconfirms the terms of the debt arrangement and reiterates the balance owed, interest rate, payment amounts and due dates and specifies that if you don’t meet the terms of the agreement, the secured item can be recovered by the creditor.
Think carefully before signing a reaffirmation
Deciding whether or not to sign a reaffirmation agreement is something you should discuss with your North Carolina bankruptcy attorney. You should never sign a document that could impact your bankruptcy without the advice and counsel of your attorney.
You pay them for their expert advice, so it makes no sense not to rely on their experience and expertise. If you have been sent a reaffirmation agreement by a lender, send it to your attorney immediately. Also, note that if you decide to sign a reaffirmation, it must be executed before your bankruptcy discharge to be valid.
To find out more about how Chapter 7 can get you the financial fresh start you deserve, contact the Law Offices of John T. Orcutt today. Call +1-919-646-2654 for a free bankruptcy consultation at one of our offices in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington. Find out how you can be debt-free by the New Year!