Reaffirm the Debt, Keep the Car

by Johnny Tisdale on February 7, 2013


When you file for Chapter 7 bankruptcy, you can choose to “reaffirm” a debt, meaning that you still want to repay it. “Why would anyone want to do that?” you may ask, considering that getting rid of your debts is the reason you filed for bankruptcy in the first place. To answer this question, we must first distinguish between secured and unsecured debts.

Unsecured debts are the most common and easily understood. You ask your friend to let you borrow $20. You’ve known each other for a long time, so she trusts you. She hands over the $20. Now you owe her $20. Your debt to her is “unsecured” from her point of view because your word is the only guarantee she has that you will pay her back.

One of the most common forms of secured debt is a car loan. Most people don’t have enough spare cash lying around to pay for a new car upfront. To buy a new car, you get a loan from a lender, such as a bank. Now you owe the bank a large sum of money. Your debt to the bank is “secured” from their point of view because if you fail to make payments, they can repossess the car and sell it to compensate for the amount that you failed to repay.

Secured debts are the kind that debtors can reaffirm. Suppose that you owe the bank $10,000 for a car loan. In a Chapter 7 bankruptcy, you can have that debt completely eliminated. Sounds great, right? But here’s the problem: If you choose to go that route, the bank can still repossess the car. This means that any money you’ve already paid on the loan will have been for nothing, unless you want to look at it as a costly car rental. Many people would prefer to continue making payments on that loan if it means that they can keep their vehicle.

One of the official bankruptcy forms that you must file with the court is called the Chapter 7 Individual Debtor’s Statement of Intention. It’s Form 8, to be exact. A portion of it is pictured above. On this form, you must list each of your secured debts and state what you intend to do with the property that secures the debt: either surrender it or retain it. This form is not optional. It must be completed and filed even if you do not want to reaffirm a debt.

If you state that you intend to reaffirm a debt, the next step is to file a Reaffirmation Agreement. This step is completed much more smoothly if you are represented by a bankruptcy attorney. Let’s return to our car loan example. First, you reach an agreement with the bank. This is easy enough. From the lender’s perspective, it’s easier to let you repay the loan than it would be to repossess the car and go through the trouble of selling it. Now all you have to do is file the Reaffirmation Agreement (Form B240A) – along with an affidavit signed by your attorney – within 30 days of the date on which you filed your bankruptcy petition.

If you’re not represented by an attorney, you must file an application to have your agreement approved by the court. Once your application is approved, you must personally attend a hearing. A judge will question you to determine whether the reaffirmation agreement would cause an undue burden for you or your family. Normally, the bankruptcy court will only approve the agreement if the property in question is necessary for your day-to-day activities. A car obviously meets this requirement, especially if it is the only one you own and you use it to get to work.

The Reaffirmation Agreement should not be neglected. If you fail to file a Reaffirmation Agreement in California, the creditor can repossess your property – even if you continue making payments and declared in your Statement of Intentions that you wish to reaffirm the debt.

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Johnny Tisdale

Paralegal at Dowe Law Firm
Johnny Tisdale is a paralegal, web designer, and writer at the Dowe Law Firm. He earned his BS in psychology and ABA-approved paralegal certificate from Auburn University Montgomery in 2011.

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