When you file a Chapter 7 bankruptcy a bankruptcy estate is opened. Your bankruptcy estate consists of such things as personal and real property. You can protect your equity in these assets through what are called bankruptcy exemptions. Alabama allows you to have $5,000 in real property exemptions ($10,000 if filing jointly) and $3,000 in what is called a wild card exemption ($6,000 if filing jointly). The wild card exemption is used to protect personal property such as vehicles and sometimes you may want to sign something called a re-affirmation agreement.
A Chapter 7 bankruptcy discharges or eliminates your obligation to pay certain unsecured debts such as credit cards or medical bills. However, it also discharges deficiencies on secured debts. The way this works is, if you owe $10,000 on a car loan that is secured by your vehicle and you are current on your payments and want to keep your automobile. Then, as long as you are current then (depending on the creditor) you can usually just keep making your payment and continue to own your car.
When you file the Chapter 7 bankruptcy and get your discharge, if later on down the road you were to stop making your payments on the car loan and the loan were to go into default, and the creditor repossessed your vehicle and sold it at an auction, then normally you would owe the difference in what they sell it for and what you owe (this is called a deficiency). However, since you filed the Chapter 7 bankruptcy and received a discharge, then you would not owe this future deficiency on your vehicle loan.
This can apply to other secured debts such as mortgages as well. Basically, the Chapter 7 bankruptcy will get rid of your future deficiencies on these secured debts, so that (for all practical purposes) you could give the property back to the creditor and walk away and not owe them anything, they can only get what they can liquidate the property for and not come after you for the deficiency. The lenders realize this and, in the case of vehicles especially, they might want you to sign a re-affirmation agreement.
A re-affirmation agreement is an agreement with the same, or similar, terms as before the bankruptcy on your loan that re-obligates you to the whole amount owed, so that you will owe any deficiencies on the secured debt in the future. These agreements have to be approved by the judge, sometimes at a hearing very soon after the meeting of the creditors. The test that the judge uses is whether the agreement is in your best interests or not, which usually means whether you can afford the payments or not. However, sometimes these types of agreements are not approved or may not even be necessary for several reasons. For example, if the creditor will allow you to continue paying (and you are current on your payments) and not require a new agreement then there may not be any need for it. Another example, is if according to your budget you cannot afford the monthly payments on the property and the creditor is not requiring you to sign in order to keep your vehicle or other property.
You might wonder, why would I ever sign a re-affirmation agreement if I don’t have to? Well, the creditors will not always report each payment that you make on your credit report if you do not sign one and will report each month if you do, which could help rehabilitate your credit score. Other than that, it is usually advisable not to sign one unless it is required or advantageous to do so in your particular case. There are certain creditors (such as credit unions and some automobile loan companies) that will require you to sign a re-affirmation agreement if you want to keep the vehicle or other property and for these entities you would usually be better off signing it if you want to keep the property and can afford it. However, whether you should sign a re-affirmation agreement on your secured debts depends greatly on your particular fact situation.
When you do not sign a re-affirmation agreement on your vehicle and just continue paying, then if several years down the road you default on the loan, you should not owe any deficiency judgment on the loan. In contrast, if you sign and file a re-affirmation agreement then you will still owe this deficiency, and cannot file Chapter 7 again for eight years. Due to this possibility of having a deficiency amount in the future (with no Chapter 7 bankruptcy recourse for eight years), sometimes it might not be in your best interests to re-affirm the debt. Call our Birmingham, Huntsville, Anniston, or Montgomery bankruptcy lawyers today if you have any questions about these re-affirmation agreements in Chapter 7 bankruptcies.
Attorney Steven A. Harris regularly blogs in the areas of family law, bankruptcy, and real estate closings on this website. He is always available in any of the firm’s offices or by phone anytime for a consultation. Mr. Harris tries to provide informative information to the public in easily digestible formats. Hopefully you enjoyed this article and feel free to supply any feedback. We appreciate our readers and love to hear from you!