Many people choose to file bankruptcy and get to keep their car or house with loans on them. When you file bankruptcy, all of your debts and assets are listed, including your home and mortgage. However, there is a place in the bankruptcy filings where you can state your intent regarding these secured assets. In the case of a house, for instance, you would indicate that you intend to keep your house by reaffirming the mortgage so that the bankruptcy does not discharge the mortgage.
Once your bank sees that you intend to reaffirm the mortgage or car loan, they will send your lawyer a reaffirmation agreement. You will need to sign the reaffirmation agreement, which generally says, among other things, that the mortgage will not be discharged as part of the bankruptcy. Then, the agreement is sent back to the bank, which signs the agreement and files it with the court.
So where can this process go wrong? Well, to enter a reaffirmation agreement, you need three approvals. First, you need the bank’s approval to the agreement. If you are months behind on your mortgage or car loan, your bank may not want to sign the reaffirmation agreement because it is intending to foreclose or repossess your property. It is important that if you are filing a chapter 7 bankruptcy that you are on time on your payments for any loan you intend to reaffirm.
The second approval you need is your own. Is it really in your best interest to reaffirm the debt? I have found that many of my clients do everything they can to hold on to a house with mortgage payments that are far too large a proportion of their budget. What will happen after the bankruptcy is over and there is an emergency? If you are living paycheck to paycheck because most of your money goes to pay the mortgage payments, you are not leaving yourself any room for contingencies or for retirement. Bankruptcy is a good time to take a good hard look at your entire financial situation.
The third approval you need is that of the court. The court will disapprove your reaffirmation agreement if there is not enough money in your budget to make the payments required under the reaffirmation agreement. The court will also disapprove reaffirmation agreements for items that are not necessary for obtaining a fresh start, like recreational vehicles. Unsecured loans like credit cards will generally not be approved.
If you get the three approvals–(1) the bank’s, (2) your own, and (3) the court’s–entering the reaffirmation agreement is relatively painless. Of course, sometimes even when you could enter a reaffirmation agreement, you might choose not to do so and still end up keeping the car or home. I will examine this issue of how to keep your car/home while not reaffirming the underlying debt in my next post.
In the Grand Rapids or Jonesville, Michigan area and thinking about filing for bankruptcy? Call me today for a free consultation!
233 Fulton St. E, Ste. 104
Grand Rapids, MI 49503