What Happens With Secured Debts in a Chapter 7?

Let’s start with the definition of what a secured debt is. A secured debt is one where the creditor has a legal right to take your collateral if you don’t pay the debt. The most common types of secured debt involve houses, condos, cars, boats, jet skis – any debt that you pledged as security for the money that was lent to you. In a Chapter 7, you must reaffirm the debt to the creditor if you want to keep it. Creditors will provide a reaffirmation agreement for you to sign if you want to keep the item. You must reaffirm all personal property debt such as cars and boats. You do not have to reaffirm a mortgage and we highly recommend that you do not. In fact, we will not sign off on a reaffirmation of a mortgage because it is not required under the bankruptcy code. If you choose to not reaffirm a debt, they can take the collateral back if it is personal property but they cannot take your house if you do not reaffirm a mortgage. What is a reaffirmation agreement?

To understand reaffirmation agreements, we have to start with explaining that in a Chapter 7 bankruptcy, once you receive a discharge, you are not liable for any of the debt that you had on the day you filed. What that means when it comes to secured debt such as cars and boats, is that if you decide a year after the bankruptcy to turn the collateral to the lender, they cannot come after you for a the deficiency that is almost always left once they sell the asset at auction. Before the bankruptcy changes of 2005, you could just keep paying the loan and keep your asset. After 2005, in order to keep any personal property, you must sign a reaffirmation agreement that essentially puts you back on the hook for a deficiency if you later have to surrender the collateral. Since you are signing the reaffirmation agreement after you filed the bankruptcy, it is essentially a “new” debt that you are liable for. Signing reaffirmation agreements is mandatory if you want to keep your car.

Mortgages are different. You do not have to sign a reaffirmation agreement to keep your house. After a discharge, many unscrupulous mortgage lenders and banks try to get borrowers to sign reaffirmation agreements so that they still have the legal right to come after you for a deficiency if you ever lose the collateral. You do not have to sign it to keep the collateral and I strongly advise against doing so. It is not in your best interests to renew their right to haunt you legally should you eventually have to surrender the property or lose it in a foreclosure sale. It is in their best interests for you to do so! Don’t do it. An attorney has to sign off on reaffirmation agreements and this firm will never sign off on a reaffirmation agreement that is not mandated by the bankruptcy code. We are committed to your best interests – not the best interests of your creditors.

In summary, a reaffirmation agreement will carve out the reaffirmed debt from your bankruptcy discharge. That means that you are voluntarily choosing to stay legally liable for that debt. It has the same effect as if you had never filed the bankruptcy on that particular debt. We will always help you by signing and filing a legally required reaffirmation agreement for any collateral or asset that you want to keep. We are always happy to discuss any reaffirmation agreement but as stated earlier, there may be situations where signing a reaffirmation agreement is not advisable.

In every Chapter 7 bankruptcy in Fort Lauderdale, you have to state to the court whether you want to keep or surrender any personal property that secures a loan. You also have the option of surrendering the property if you can’t afford it or just don’t want to keep it. Surrendering a car or boat during the bankruptcy process ensures that the creditor cannot come after you for a deficiency balance after they sell it at auction. But if you reaffirm the debt during bankruptcy and then lose the property afterwards, they can.

As information, most creditors sell repossessed or surrendered cars and boats at auction and they usually sell it for less than the balance. They don’t care if they are selling for less than the balance because after they sell it, they add the auction costs and other fees to the balance and then come after you for this “deficiency balance.” If you reaffirm the debt during a bankruptcy and then surrender the property – they can come after you for the deficiency. If you do not reaffirm the debt and surrender during the Chapter 7 case, the balance is part of the discharged debt and they cannot try to get you to pay it. This is why it’s important to carefully assess whether you can afford to keep property before you reaffirm the debt.