Reaffirmation of Debt Need Not be Under Same Terms as Original Loan

05/09/11

negotiation with credtorsMost people know that Chapter 7 allows you to wipe out unsecured debt – credit card bills, medical debt and other signature loans.  But what about secured debt – loans you are still paying to finance your home, your car, perhaps some jewelry or furniture?

This past March, I discussed redemption of property in Chapter 7.   Redemption of property is a viable option but it is far less common than "reaffirmation" of debt.

Why Do You Need to Reaffirm?

Secured loans actually contain two different kinds of obligations.   On one hand, you obligate yourself personally to pay a particular debt.  This is typically in the form of a promissory note.  The second layer of obligation ties the specific item of property to the loan.  This is called a security agreement.

When you file a Chapter 7 and a discharge is issued by the judge, your personal liability on your secured debt is extinguished.  This is why payments on a non-reaffirmed car loan or home loan will not be reflected on your credit reports.  You have no personal obligation to pay.  However, a Chapter 7 discharge does not extinguish the lender's security interest against property.  This is why a vehicle lender can repossess or a mortgage company may foreclose to recover property.   In such a situation you would not have any personal liability for any deficiency amount.

A reaffirmation serves two main purposes:

  1. you will have the certainty of knowing that you are once again in a contractual relationship with the lender.  If you do not reaffirm, you could wake up one day to find that your vehicle has been repossessed or that you are being foreclosed upon.
  2. secondly, payments on a reaffirmed debt will appear as positive information on your credit reports.  This means that your credit score will recover more quickly

Can You Negotiate Better Terms in a Reaffirmation?

Because a reaffirmation agreement is a new contract between you and your lender, you absolutely can negotiate different terms.  I have negotiated reduced payments, lower interest rates and reduced balances on furniture, electronics, and vehicles.  I have also negotiated lower payments on 2nd and 3rd mortgages.

It has been my experience that some lenders will just not play ball.   They would rather incur the expense of recovering, storing and reselling a used item.   I think this attitude of  "we do not negotiate with debtors" is silly and counterproductive, but some lenders take this position (I suspect that some of these lenders do not have the staff or protocol for handling a negotiated debt).

On the other hand, many lenders will agree to a deal with terms a lot better than the original contract.  But you do have to ask, and, of course, if you agree to any terms, you must live up to the deal.  Reaffirmation agreements can be canceled by the debtor within 60 days after the agreement is entered, or the case is closed, whichever comes first.

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