A major fear many people have about Chapter 7 bankruptcy is that it will cause them to lose property to liquidation. In reality, bankruptcy is quite flexible, and Chapter 7 is not an exception. You may even keep property that creditors have a claim on.
Secured property consists of possessions such as real estate or vehicles that serve as collateral. In the event you stop making loan payments, the lender has the right to take the property. Through Chapter 7, you may consider reaffirming the debt to hold on to your secured property.
How debt reaffirmation works
Generally, Chapter 7 bankruptcy discharges your debts, meaning you have no legal obligation to pay them. However, your secured creditors, such as your car or mortgage lender, may still have the right to seize property they have a secured interest in.
By reaffirming the debt, you make an agreement with the creditor that you will keep paying the debt. Although you could otherwise receive a discharge of this debt in bankruptcy, reaffirming the debt lets you secure a promise from the creditor not to take back the property as long as you provide payments.
The process of reaffirming a debt
Even if you and your creditor agree to a reaffirmation, there is no guarantee your bankruptcy judge will go along with the arrangement. To reaffirm a debt, you must sign a written reaffirmation agreement with the creditor and file it with the court before you receive approval of your debt discharge.
The agreement must include detailed disclosures about the debt, including the amount owed and how to calculate the payment. You must also provide the court with a statement of your current income and expenses. This shows you have enough money to service the reaffirmed debt. If the court determines that affirming the debt would create an undue hardship for you, it may refuse to approve the reaffirmation agreement.
Debt reaffirmation is not for all Chapter 7 filers. If it meets your situation, however, you can not only hold on to a piece of secured property, but you can also show that you can make payments on debt very soon after going through bankruptcy, helping you rebuild your credit that much sooner.
