Reaffirmation and Redemption in Chapter 7 Bankruptcy

Reaffirmation is a signed document filed with the Bankruptcy Court that renews your agreement with a creditor. It is typically executed when you file Chapter 7 and you desire to keep your car, house, or other secured collateral. You generally need to be current on your loan payments with the creditor you are reaffirming with. The payment terms and conditions of the loan generally do not change. If you change your mind about reaffirming a debt, you can rescind the reaffirmation any time before the Court issues a discharge, or within 60 days after the agreement is filed with the Court, whichever is later. 

Occasionally, a better option may be to redeem the property, by making a lump-sum payment equivalent to the property’s total value. For example, occasionally my client will have a car worth $18,000, but they owe $35,000 on it. This typically happens when they trade in a car and role over the negative equity into the new car loan. Chapter 7 Bankruptcy allows my client to pay the car creditor $18,000 all at one time (the value of the car), and the Creditor has to release the title in exchange. This essentially saves my client $17,000! Where does my client get the money to do this you might ask. There are finance companies that specialize in loaning the money to Chapter 7 Debtors, and they become the new lien holder on your car. Typically, these finance companies want the car to be no older than 3 years old, and a solid, stable job for the Debtor is also required.

Common Mistakes When Filing Bankruptcy

There are many mistakes I have seen my clients make prior to filing Bankruptcy. These mistakes can be prevented by being honest with your Attorney and with proper planning and discussion with your attorney. Some of the most common mistakes are the following:

1. Leaving out a creditor.  Many clients intentionally leave out a Creditor. Common reasons are being afraid that the Creditor will repossess their property, or that the Creditor has been “good to them” and hoping that they can handle the debt on their own. Failing to list a Creditor always comes back to haunt a client. The law requires that all your creditors be listed, so that all creditors are treated equally. Don’t forget to list any co-signed liabilities you share with another party as well.

2. Waiting until the last minute to file. Don’t wait until your wages are Garnished or your Bank account is levied. If you see the writing on the wall, then the sooner you file, the sooner you can obtain financial relief and regain control.

3. Filing bankruptcy when you are expecting a large tax refund. Tax refunds are as good as cash in the Courts’ eyes. If you expect to get a large tax refund in the near future, be sure to tell this to your attorney before your file your case. Generally your case can be structured to retain the refund, but proper planning must be made ahead of time.  

4. Making large purchases on your credit card before filing. Do not make large purchases on any credit accounts within 90 days of filing. Doing so is generally considered fraud.

5. Transferring assets before filing. Many clients transfer their property to relatives, thinking it will keep the property out of the Bankruptcy Court’s reach.   This is the worst mistake anyone can do. Not only could such a transfer be undone by the Court, or the case dismissed without discharge, but many times the property would have been protected under bankruptcy if the transfer did not occur. Once the transfer occurs, the property actually becomes un-protectable!