According to a 2019 Survey, the average American household has $140,416 worth of debt. That could include a variety of things like mortgages, credit card debt, medical bills, and student loans. If the “bread winners” of the family are working and making a decent income, that seems manageable. However, the slightest change in finances, like a reduction in hours or layoff can upset the whole financial equilibrium of the household. This leads many families to bankruptcy.Loan Modification is Sometimes an Option
If you are filing for Chapter 7 Bankruptcy, you usually leave the bankruptcy “clean” and free of many of their debts. However, there are times where you have a home or a car that you are interested in keeping. In those situations, the home or the car might have a secured note on it. The secured aspect of the note simply means a creditor has an attachment on property (also called collateral) to make sure the bank can be repaid if the debtor misses payments. Common examples are home mortgages, automobile loans, and home furniture loans.
When you declare bankruptcy, the bank that you borrowed money from to purchase your home does not just forgive the two hundred thousand you owe. The same is true with your car loan. When you file for bankruptcy, you can do one of two things with secured property: you can retain it or you can surrender it.
If you surrender the property, you get out of the contract you signed to pay the bank back. Meaning, you don’t have to pay the bank back that $20,000 you owe on a ten year old car that has a 15% interest loan on it. That doesn’t mean you get to keep it though.
If you want to retain the property, you might want to modify the loan you have with the bank. Just because you filed for bankruptcy does not mean the bank will just lower your interest rate, but they might however give you more time to pay it back.
Banks generally do not want to own property, so they will try to work with you upon your declaring bankruptcy. For a mortgage, they might be willing to expand that 20 year note to 25 to allow you to lower your payments. For an auto loan, they might be willing to extend the 4 year note to 6 years.Reaffirmation Agreements
A reaffirmation agreement is a promise to back debt even though you no longer are legally required to. The most common areas we see them are in the context of automobile loans. Picture a debtor who files for Chapter 7 Bankruptcy. Of the many credit card debts they have, they also have an automobile loan that they owe $15,000 on with the Bank.
When they file for bankruptcy, their contract with the Bank is legally cancelled, so the debtor no longer owes $15,000. However, if they want to keep the car, the Bank is going to require them to sign a new promise to pay back that $15,000 or they are going to ask the Bankruptcy Court for permission to repossess the vehicle. Marcotte Bank would require the debtor to sign a “Reaffirmation Agreement.”
A reaffirmation agreement is filed by the creditor and debtor and is approved by the Bankruptcy Court. In the agreement, the debtor has list what their monthly expenses and income is. This will show what the debtor has for disposable income after their expenses. We then take that disposable income and subtract the proposed monthly payment that will start if the debt is reaffirmed.
If the disposable income is now zero or negative with the proposed monthly payments, then there is a presumption of undue hardship on the debtor. In this case, the Bankruptcy Court will require the debtor to appear for a hearing and explain to the Court how they can afford to pay back this debt. If there is no presumption of undue hardship, the Bankruptcy Court generally approves these agreements without intervention.
Signing a reaffirmation is a serious financial decision and negotiating with creditors to modify a loan after a bankruptcy is difficult. Do not try to do this yourself. We have trained professionals with years of experience who can walk you through the process and get you the financial relief you desperately need. Call us today for a free consultation at (978) 458–1229.