Beware of Reaffirmation Agreements in Bankruptcy

Long & Long Team

When a Chapter 7 bankruptcy is filed and a discharge is entered, and so long as the debtor did not sign a reaffirmation agreement, the lender’s only recourse in the event of a missed payment is to recover the collateral. The Chapter 7 Bankruptcy discharge precludes the lender from holding the borrower personally liable on the debt.

The Pass-Through in Chapter 7 Bankruptcy

Usually a debtor wishes to keep the vehicle or home and continue to make timely monthly payments until it is paid off. In that case, we file a Statement of Intention with the Bankruptcy Court. The Statement declares the debtor wishes to retain the vehicle and continue to make payments pursuant to the original contract. This is known as a pass-through . After all of the monthly payments are timely made as under the original contract, the lender will convey title to the debtor.

There are tremendous advantages to the pass-through. For example, if the debtor can no longer afford it the creditor’s only recourse is to repossess the vehicle. If the engine fails and is not worth repairing, the debtor can simply return the vehicle to the lender without personally liability. Similarly, if a debtor no longer can afford the home he can allow it to go into foreclosure without any personal liability. Another advantage is that the lender may give the debtor additional time to cure the missed payment. Why? Because the lender knows it no longer has the option of suing the debtor for the deficiency amount.

The Reaffirmation Agreement in Chapter 7 Bankruptcy

A reaffirmation agreement is an agreement whereby the debtor agrees to remain personally liable on the debt as if the bankruptcy never occurred. Signing a reaffirmation agreement is a bad idea as it takes away all of the advantages of the pass-through . Rarely does a lender require a court-approved reaffirmation agreement. The reason is the lender does not really want the collateral back. Instead, the lender wants the debtor to continue making monthly payments on the loan balance which is where they make their money. Keep in mind, however, that payments to the lender do not go on one’s credit report since the debt has been discharged.

If you have any questions on this matter, please do not hesitate to call LONG & LONG P.C. at (303) 832-2655 or at………

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