Chapter 7 Bankruptcy – When is it a Bad Idea to Reaffirm A Debt?
In a Chapter 7 bankruptcy, it is sometimes a bad idea to reaffirm certain types of debts.
Reaffirm means you re-obligate yourself on the debt. Or in other words, you legally agree to treat the debt as if you have never filed Chapter 7 bankruptcy against it.
For example, lets you bought a car from a dealer in Cartersville Georgia and you want to keep the car after you file Chapter 7 bankruptcy. When you file Chapter 7, your debt to the dealer is wiped out. However, unless you reaffirm the debt, the dealer has the legal right to repossess the car from you after they file a Motion for Relief from the automatic stay to get the car back.
If you are in a situation where you expect your income to drop in the near future, why would you ever want to reaffirm any car debt. Since, you can file Chapter 7 only once every eight years, why put yourself on the hook for some car payment if you know you won’t be able to pay for it in a few months?
Another type of debt you should never reaffirm is unsecured debts. An unsecured debt has no collateral that backs up the debt. A signature loan, a medical debt and credit card debt are examples of unsecured debts.
Most of the time, the reason some bankruptcy client wants to reaffirm an unsecured debt is because of a cosigner. I few weeks ago, I was meeting with a young client who wanted to reaffirm an unsecured signature loan because is was consigned by her grandpa. In these types of situations, I think it is best to file Chapter 13 to take advantage of the cosigner protection provision.
In most Chapter 7 situations, the debtor cannot afford to pay for the consigned loan. The purpose of a Chapter 7 bankruptcy is to give you a fresh start. Why would you want to weigh yourself down with some unsecured debt? Furthermore, there is a provision in most reaffirmation agreements where your bankruptcy attorney must sign stating that it is in your best interests to reaffirm. How could reaffirming an unsecured debt ever be in your best interest?