Debt can be overwhelming for most people. When one is unable to service their debt or loans, they often file for bankruptcy. This is a court process that breaks the contract you entered with your lenders. Sometimes, however, you may want to keep the loan running after the bankruptcy process, especially when the property you used to secure the debt is precious to you, and you do not want to lose it. In such a case, you may enter a reaffirmation agreement with your creditors, declaring that even after the bankruptcy process, you will take responsibility for the debt and secure your collateral.
A reaffirmation agreement is a new contract with your creditors, keeping the old terms of the debt. This agreement must be presented to the court to indicate the new deal. When faced with debt that you are unable to pay, a bankruptcy lawyer can help you with your bankruptcy process. Writing a reaffirmation agreement is a legal process where a lawyer is best placed to advise you. Get in touch with us at the Los Angeles Bankruptcy Attorney to learn more about the reaffirmation agreement.
Understanding Reaffirmation
If you enter a reaffirmation agreement, it means you acknowledge that you still owe the creditor for the particular debt, even after the completion of your bankruptcy hearing. A creditor lien is that legal power a creditor has over your property if you do not pay your debt as agreed. A promissory note is the agreement to pay your debt when you borrow. A reaffirmation agreement protects both the creditor lien and the promissory note through the bankruptcy process. This is usually introduced for a particular debt, meaning after your bankruptcy case, that particular debt will not be affected. This will be like you petitioned for bankruptcy on all other debts, but this particular one remains intact.
Most people, as earlier mentioned, enter into reaffirmation agreements when they want to protect particular collateral, especially a car from being recovered for a debt. However, you cannot enter a reaffirmation agreement when you have been inconsistent in paying for the said loan. The law expects a debtor to be up to date with the loan repayments. Additionally, you must protect the equity for the property using a bankruptcy exemption. If you are unable to exempt the property’s equity entirely, the trustee may auction the property and pay unsecured creditors from the proceeds.
Secured and Collateral Debt
When you want a loan, you can bet either a secured or an unsecured one. Some people may not know the difference, but it is relatively simple. When you apply for a loan, you may be asked to provide collateral for the loan. This is typically property that the creditor can sell to recover their money should you decline to service your debt. The collateral requirement is especially required when one is borrowing vast sums of money. When you provide collateral, a lender is guaranteed that payment of the debt will be made even when you breach the agreement of paying your debt.
When you secure debt with property, you create lien ownership of the property by the creditor. This kind of interest ownership stays in place until you pay the debt owed. Once you pay the debt altogether, your property returns to you. A lien interest is what permits a creditor to repossess the property should you fail to pay as agreed. If you have a mortgage loan, when you fall back on your payments, it is the lien that authorizes the creditor to foreclose on your house.
When a creditor or a bank owns a collateralized debt, it is termed as a secured loan or debt. When you file for bankruptcy, the bank will seek reimbursement by filing a secured claim. This means, when the bankruptcy trustee auctions the collateral, the secured lender must be the first one to get paid. Afterward, the remaining money can be used to pay the other creditors with unsecured debts.
Fortunately, not every creditor will need security or collateral from a person to give them a loan. When a creditor is unsecured, it means the creditor has no lien interest in the property. This means that when a borrower fails to pay their debt, an unsecured creditor cannot take property belonging to the borrower to pay the debt off. Medical bills, personal loans, and credit cards are some types of unsecured loans.
An unsecured creditor will have to file a lawsuit on debt collection to be paid for the debt. If the unsecured creditor wins the case and records the judgment money with the recorder’s local office, they gain security interest.
Benefits of Entering a Reaffirmation Agreement
When you want to keep the collateral you used for a particular debt, you can enter a reaffirmation agreement.
However, you must ensure to keep your payments up to date to avoid the creditor from taking the collateral and selling it.
Reaffirmation agreement also gives the grounds for renegotiating new terms with your creditor. If you felt pressed to pay the debt, you get an opportunity to request to have the payments or interest reduced. If this is agreed, you stand a chance to keep your property and keep paying off your debt.
Disadvantages of Entering a Reaffirmation Agreement
When you are in a lot of debt and file for bankruptcy, it means you do not want to be responsible for the debts. However, a reaffirmation agreement does not absorb you from your responsibility to pay your debt. Even after your bankruptcy case, you will be held liable for the debt and bound by the law to pay the debt. If the collateral was a car or any other thing and it gets damaged, you still are obliged to pay off the debt. You must remember that the law does not allow you to file for bankruptcy again until eight years are over. This means you get stuck with your debt over a long period.
Once you have entered a reaffirmation agreement to keep paying for your car after bankruptcy, when you default, the creditor can repossess the vehicle. When the creditor auctions the vehicle, if the amount recovered is not enough to pay your debt, you are still legally required to pay the deficit.
For instance, if you had bought a car on loan for $10,000 before filing for bankruptcy, you will still owe $10,000 on the vehicle even after the bankruptcy as long as you entered a reaffirmation agreement. If you fail to keep up with your installment payments, the creditor will repossess and auction the car. If the creditor recovers $7,000 from the auction, it will mean there is a deficit of $3,000. The law allows the creditor to demand the gap from you and can sue you for the same.
Another disadvantage of reaffirmation is that even when the item held as collateral gets damaged, you will not get absorbed in debt. For instance, if you have a computer that you used to secure a $1,000 loan with, after a reaffirmation agreement, you must pay the debt in full. Unfortunately, as you work, you spill soda on the computer, and it gets damaged, you cannot claim this as a reason to stop making payments for the money owed. The reaffirmed amount must be paid in full to avoid a lawsuit from the creditor.
Reaffirmation Restrictions
When you want to enter a reaffirmation agreement, your first obligation is to ensure bankruptcy trustees cannot take it and auction it. If the equity on the property is such that you are unable to use bankruptcy exemption to protect it, the trustee will sell it, submit the exemption amount to you and pay the creditor. The money that remains from the sale of the property will then be used for unsecured debts.
When you can protect the equity of all your property, you can then use reaffirmation agreements and continue making payments. However, the creditor must agree on the changes in the terms. This reaffirmation agreement is required to be filed in court during your bankruptcy case. Your bankruptcy lawyer is expected to sign the reaffirmation agreement confirming that it will not strain you financially. If you have no lawyer, the court will look at the contract and review its contents during a reaffirmation hearing.
A judge during the hearing will consider the effects of the reaffirmation post your bankruptcy budget, and if the payments are affordable to you. If the judge finds that the agreement is not favorable to your interests, he or she will disapprove of it. The judge in doing this protects your family and yourself from unnecessary financial hardships.
Rejections are typical in cases where the judge sees that you will be unable to keep on the agreed payments after taking care of your basic needs. If what you owe is more than the value of the property, the judge can also reject the reaffirmation agreement.
When it Makes Sense to Enter a Reaffirmation Agreement
As earlier discussed, when you enter a reaffirmation agreement, it leaves you with the burden of debt even after the conclusion of your bankruptcy case. For this reason, you should only consider this agreement if:
- Your creditor asks and pushes for it
- It is the only option you have of retaining your valued collateral
- You sufficiently believe that you will pay the balance without strain.
When you have properties that you highly value and do not want to lose them, getting into a reaffirmation agreement may be the only way to save them.
Sometimes, the debt you owe may be significantly lower than the value of property used for collateral. When you allow the auctioning of the property, the money recovered may not cover your debt, leaving you with a deficit to pay. Getting into a reaffirmation agreement in such a case may be the best option to save your property and avoid further loss.
When you decide reaffirmation agreement is the option, you will need to get your lender to agree to a lesser amount than your debt as repayment in full. Most creditors will agree to this because it is better than failing to get paid at all. In most cases, however, people avoid reaffirming debt that is higher than the cost of replacing the collateral.
How Reaffirmation Works in Bankruptcy
In reaffirming a debt, your creditor and yourself agree to new terms of the mortgage. This is written down and filed in court. While registering in court, two court forms are used. Form 27 is the cover sheet for the reaffirmation, while form 240A is the agreement you have entered with your creditor. If your creditor is a big firm, they will likely handle all the paperwork, but you only sign where necessary.
Once the agreement is filed in court, you will appear for a hearing in a bankruptcy court. The judge, after evaluating the application, he or she will decide to approve of it or disapprove it. When the court finds the agreement will not provide relief to you but more hardships, it will refuse the contract. As mentioned earlier, some of the reasons the court will give in disapproving your application for reaffirmation agreement are:
- After taking care of your necessary expenses, you will not be left with sufficient money to make the payments for the debt
- The balance on your debt is much higher than the value of the collateral you want to save
- The interest charged on the debt following the reaffirmation agreement is exorbitant
- When the loan is not actually secured. For instance, if you take a second mortgage on your home, it means you have two loans against the same property. However, if the first mortgage is higher than the second one, it means the other debt is not secured. In such a case, the court will not approve of the reaffirmation agreement. Additionally, reaffirmation agreements that involve mortgages are typically not authorized by the court.
Why the Court Schedules Reaffirmation Hearings
When you file for bankruptcy, you can consider a reaffirmation agreement when you have voluntarily discussed it with your creditor. Your attorney must advise you fully on the consequences of entering into such a contract and ensure the deal will not cause undue hardship on you. The debt owed must also not have been discharged at the time you enter the agreement. When all these requirements are met, you do not need the court to approve the deal.
When you are unable to meet all the conditions discussed, the court schedules a hearing that helps determine whether to approve or disapprove of the agreement. Some of the reasons that cause the court to schedule reaffirmation hearings include:
- You did not have a lawyer represent you or
- There is an assumption that the reaffirmation agreement will bring you more financial hardships than relief.
When not Represented by a Lawyer
After entering a reaffirmation agreement, your bankruptcy attorney needs to sign it to attest having discussed it and explained the repercussions of agreeing. In case you have no attorney representing you or the attorney has declined to sign the reaffirmation agreement, a hearing must be held.
For instance, you have a car that you owe money on and value it. Because of the many debts you have, you get a lawyer to file a bankruptcy suit on your behalf. As the lawsuit is filed, you are up to date with your car loan repayments, although you feel they are high. Your lawyer may refuse to sign your agreement when he or she feels the car is too expensive for you. You, however, sign it and file it in court. In such a case, the court will schedule a hearing to determine if you qualify for a reaffirmation agreement or not.
The Assumption of Undue Financial Hardships
When filing for bankruptcy, you are required to include schedules that show how much you earn and your expenses. In your costs, you must consist of the debts you want to reaffirm and how you will pay for them. Inclusive of the reaffirmed debt, the variance between your costs and income must be over zero.
If you are financially strained because of the reaffirmed debt, it will be assumed that it will cause you unnecessary financial hardship. Due to this, you will be expected to attend a hearing where you are given an opportunity to explain how you will make the payments and why you must keep the collateral.
What Happens During the Hearing?
After getting your hearing date, you will appear in court together with your attorney. Irrespective of why he refused to sign your reaffirmation agreement, your lawyer is allowed to represent you. The judge may also question his decision not to sign the deal.
Once your case is called, you will be expected to provide evidence that getting your debt reaffirmed will not cause you financial hardship. You must show that even with this payment, you can take care of your other expenses. You may also be required to give a testimony stating that you understand the repercussions of the agreement. One of the requirements is to know you are responsible for the debt after the completion of your bankruptcy case.
When you satisfy all the conditions set forth by the court, your reaffirmation agreement is approved, and you get the opportunity to safeguard your collateral.
Consult a Los Angeles Bankruptcy Lawyer Near Me
Every person wants to avoid debt as much as possible. Unfortunately, you may face financial challenges despite having planned well. This may prompt you to file for bankruptcy for the lack of a better option. When this happens, you may realize you have valuable assets that you are better off securing than losing. For this reason, discussing with your creditor and entering a reaffirmation agreement might be your best option. However, you must engage a bankruptcy lawyer to advise you on the requirements and repercussions. At the Los Angeles Bankruptcy Attorney, we understand the financial burdens of our clients and offer financial advice based on the law. Call us at 424-285-5525, and let us help you understand all bankruptcy issues.
