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Please explain how reaffirming a debt works and what the pros and cons are of doing so.

Minnesota |

Is reaffirming a debt the same in Ch. 7 vs. Ch. 13?

Do the terms of the loan get modified? If so, how? Will payments be reduced, or do they remain the same, or can they be increased?

If you owe more on a vehicle than it's value, you have always been current on payments, and your willing to continue making payments, are creditors generally willing to either reduce what you owe, or reduce the interest rate?

What about HELOCs? What happens if they are reaffirmed?

Please explain the reaffirmation process and what the pros and cons might be.

Thank you!

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Attorney answers 1


There is no formal reaffirmation agreement in a Chapter 13. If you choose to keep your vehicle in a Chapter 13, the terms of the loan may be changed under certain circumstances. In a Chapter 13, if you purchased your vehicle more than 910 days prior to filing bankruptcy, you can actually propose to pay the creditor for just the fair market value of the vehicle at a reasonable interest rate (normally prime plus 2 normally works in Georgia). Since car payments are normally included in your monthly Chapter 13 payment to the trustee, you would not actually make a separate car payment to the creditor. In a Chapter 7, in order to keep a car, you have to sign a reaffirmation agreement. Some creditors are willing to make minor modifications to the terms of the loan in a Chapter 7 reaffirmation agreement, but most are unwilling to reduce interest rates or balances on such loans. If you choose to sign a reaffirmation agreement in a Chapter 7, you will continue to be obligated under th terms of the loan, even after your bankruptcy case is closed and other debts are discharged. Because you are prohibited from re-filing another Chapter 7 for a period of 8 years and the reaffirmed debt is not discharged, if you default on a reaffirmed car loan, the creditor will be able to initiate collections procedures against you. Thus, reaffirming a debt in a Chapter 7 is a serious decision, and you should only reaffirm that debt if you are able to afford the balance, payment terms, and interest rates based on your budget. The advantages of reaffirming a car debt in a Chapter 7 would be that you will be able to keep your car and will not have to buy or finance a new car, which would likely have to be done at a high interest rate. Further, if the terms of the existing loan are already good, then you will have the advantage of keeping a low interest rate loan even after you file bankruptcy. As for reaffirming a HELOC, at least in Georgia, the second mortgage company should already have a lien against your house to protect its interest. That lien does not go away in bankruptcy. Reaffirming a second mortgage, especially in this market, could mean obligating yourself on a debt when there is no equity in your home. Normally, mortgage companies will not foreclose if you keep your monthly payments current, even absent the signing of a reaffirmation agreement. You should consult with a lawyer in your jurisdiction to obtain more details about reaffirmation of a second mortgage and whether it is a good option for you.

Disclaimer: The answer written above is not intended to give legal advice. Please consult a lawyer in your jurisdiction for detailed advice as to your particular circumstances.

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