When you purchase a home or car, in most cases the lender takes what is known as a “security interest” in the home or car when loaning you the money to make the purchase. The purchased item then serves as collateral for the loan. When a lender takes a security interest, it can take back the collateral if you fail to make the required payments.
If you are current on the payments on such a loan and can afford to continue to make payments you can enter into an agreement with the creditor to continue to pay that debt even though you have filed for bankruptcy. That agreement is called a Reaffirmation Agreement. This agreement “renews” or “reaffirms” your promise to pay the debt, and in exchange you get to keep the property. Reaffirmation Agreements only apply when there is property that secures the loan like a house, car, computer or even tires, for example. You cannot reaffirm a debt to a medical provider or family friend because there is no property involved with that debt.
In some cases, the court requires you to attend a hearing to determine whether signing the Reaffirmation Agreement is in your best financial interest. At the hearing the judge will ask you a few questions about the loan and your income and then determine whether he or she feels it is in your best financial interest to reaffirm the loan. If the judge decides it is in your financial best interest, he or she will sign the agreement and you will be obligated to pay the loan in full even if later on you cannot afford to make payments and the creditor repossesses the vehicle or other property.
If the judge decides it is not in your financial best interest to reaffirm the loan, in most cases you can still keep the vehicle or other property as long as you are current on the payments and continue to make timely payments. However, if you become unable to pay the loan at a later date, the lender can repossess the vehicle or other property but cannot seek further payment from you nor sue you to collect the balance of the loan.
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For informational purposes only and not to be relied upon as legal advice.
by John A. Pinzelik