What is a reaffirmation agreement in bankruptcy?
Immediately upon filing a bankruptcy petition in Michigan, whether it is a Chapter 7 or a Chapter 13 bankruptcy case, the automatic stay goes into effect. The Automatic Stay in bankruptcy stops all actions by creditors, including stopping repossession or seizure of automobiles. After you file your bankruptcy, your automobile finance company may ask you to sign a document called a reaffirmation agreement. A reaffirmation agreement is a legally binding contract between you and one of your creditors that you sign during your bankruptcy case. The agreement is filed with the bankruptcy court and results in that debt surviving your bankruptcy as though you had never filed. It’s generally not a good thing for the debtor, because it puts you back on the hook, and you filed bankruptcy to get debt relief in the first place. Reaffirmation agreements are usually frowned upon by most competent bankruptcy attorneys, but sometimes, they are the right thing to do.
A personal bankruptcy filing is a powerful legal action. You actually have the ability to get out of contracts you have made with your creditors. Not only can you discharge or wipe out credit card debt, medical bills and other unsecured debt, but you have the ability to cancel your obligations with secured debts such as your car and house and surrender them back to the creditor or simply continue to make payments and keep the collateral without the underlying contract hanging over your head.
Reaffirming your Vehicle after Filing Bankruptcy in Michigan
Bankruptcy law requires you to list all of your debt. This includes mortgages and car creditors in addition to unsecured creditors like credit card and medical bills. A car finance or leasing company must be listed on your bankruptcy petition and technically the car is included in bankruptcy, even if you wish to keep it. Bankruptcy laws allow you to reaffirm certain debts. Reaffirming a debt in bankruptcy is a serious decision which should only be made after a consultation with your bankruptcy attorney. Some points to discuss with your attorney are:
- Do you want to keep this car? Is it worth what you owe on it?
- What is your interest rate? Is it low 0 to 6% or High 12-25%?
- How many months remain on the contract? Will it be paid off soon?
- Can you afford this vehicle or are you better off surrendering it to the creditor?
I see many clients in my Detroit bankruptcy law office and when I ask a client what kind of car they have, I sometimes get responses from clients who are embarrassed to tell me that they drive an older car with lots of miles and some dents and dings. I ask them, “Is it paid for?” Why yes, It’s always been paid for, I bought it for cash a few years ago with my tax refund. I tell them well then there is nothing to be embarrassed about. I’d rather see them driving a paid for older set of wheels than a brand new SUV with a $600 payment and a $400 per month insurance policy. Pre-tax this would be a $1500 per month obligation. The best vehicle is one that still gets you to and from work, school and the grocery store, but is paid in full.
Reaffirming a vehicle loan can be risky due to the fact that should you later fall behind on the vehicle and miss payments, the creditor can repossess it, sell it at a private dealer auction, and sue you for the difference just like before you filed the Chapter 7 bankruptcy. A reaffirmation agreement must be filed during your bankruptcy case and either your bankruptcy attorney must attest to your ability to repay it and that it will not impose an undue hardship on you or your dependents or the agreement must be approved by your bankruptcy judge. Your attorney and bankruptcy judge will want to make sure that signing the reaffirmation is in your best financial interest keeping in mind that you have just filed for bankruptcy protection and they do not want to see you back in financial trouble shortly after filing.
What about leased vehicles? Can I keep my leased vehicle if I file Bankruptcy in Michigan?
Most creditors will allow you to Retain and pay the car after filing Bankruptcy.
Bankruptcy law allows your car finance lender the ability to repossess your vehicle after filing if you do not sign a reaffirmation agreement even if you are current on all your payments, but they are not required to exercise this option. In fact, most lenders will simply allow you to keep the vehicle as long as you continue to make your monthly payment and keep all insurances as required by law and contract. It’s in their best interest to let you keep it and simply collect the stream of payments. It costs them money to hire a repo man, storage facility and auction house and they typically get very little at the private dealer auction at which it would be sold. Therefore, simply continuing to make your payments after filing bankruptcy is generally the best option as you retain the collateral, without an underlying contract. About the only negative with choosing this route is that your lender may refuse to post anything (even a positive payment history) on your credit report however you could show a later potential lender your positive payment history without your credit report. Your bankruptcy attorney can advise you on which option is in your best interest and the pros and cons of each.
Buying a car after bankruptcy is not impossible. My clients are reporting to me that, after they file their bankruptcy case, they receive numerous offers from car dealerships in the metro Detroit area with offers to purchase vehicles through their lots. I always counsel my clients to be sure to shop for the best interest rates and financing terms available.
Let me help you get your financial life back on track. I am a Michigan bankruptcy attorney who has counseled thousands of clients through bankruptcy and helped them relieve the stress that debt can cause. I am a Board Certified Specialist in Consumer Bankruptcy Law and I give free consultations and never charge unless I can help you and your family. Call me today toll free at 1-888-4Walter (313-962-4656).