BANKRUPTCY PART 8——–Secured debts in a Chapter 7 bankruptcy

Posted by on Apr 6, 2018 in Questions and Answers | 0 comments

 Secured Debts in a Chapter 7 Bankruptcy

A Chapter 7 bankruptcy wipes out your personal liability on all dischargeable debts including your mortgage and car loans.  However, if your lender has a lien on your property, which is normally the case if you have a mortgage or car loan, the lien remains attached to the property and the lender can still repossess or foreclose on it if you don’t make payments.  These debts, in which you pledge property as a guarantee that you will pay the loan, are called secured debts.  A lender may repossess secured property even if you are current on your payments unless you reaffirm the debt.

When you reaffirm a debt you essentially sign a new agreement that makes you personally liable on that loan again.  This means that you are foregoing the benefit of your bankruptcy discharge on the reaffirmed debt.

Here are some reasons why you might want to reaffirm a secured debt.

To Rebuild Credit Faster

When bankruptcy wipes out your personal liability on a loan, the creditor usually no longer reports your payment history to the credit reporting agencies.  So even if you continue to make your mortgage or car payments after the bankruptcy they will not appear on your credit report and will not help improve your credit score.

To Receive Better Loan Terms

When you reaffirm a debt, you are signing a new contract which means that you are free to negotiate terms that are more favorable than your initial agreement.  Lenders may offer a lowered interest rate or a reduced principal balance to convince you to reaffirm.

To Protect Against Repossession

Even if you continue to make timely payments, your lender can still take your property back if you fail to reaffirm the debt.  While many lenders are happy to receive your payments and let you keep the property without a reaffirmation, some will still repossess your property.

In contrast, if you don’t reaffirm the debt and the lender repossesses the property, it cannot go after you for the deficiency. Liability for the deficiency is wiped out with the Chapter 7 discharge.

Even if you don’t reaffirm, many lenders (with a few exceptions) will still let you keep the property as long as you make timely payments on the loan.  However, you should make sure that your lender will not repossess your property before deciding not to reaffirm if you cannot afford to lose it.

If you need further info, please call Attorney Linda Fessler at 213-446-6766 for a free consultation.

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