Don’t sign a Reaffirmation Agreement Without a Really Compelling Reason

Nothing is better than being debt free.

The title of this blog post is a nearly exact quote of what I just told a client in a Chapter 7 case.  In that case over the course of a week I had received a proposed reaffirmation agreement from a credit union for a car loan and another one from a bank for a second mortgage.

I told my client that I thought she should sign the first one but that I was really against her signing the second one.  Why such seemingly contradictory advice?  Here’s a summary, with names and other identifying specifics omitted, of how I explained it in an email to my client:

There’s a lot of stuff I need to tell you about.  None of it is bad news,  just routine.  Here goes.

A reaffirmation agreement is a contract which, when filed with the bankruptcy court before the discharge date, reinstates a particular debt as if the bankruptcy never took place.  I usually advise against signing them, but if you really want to you can do it anyway.  I can’t stop you.  I don’t like reaffirmation agreements because they usually have language in them that says paying will not be a hardship or problem for you at all.  This contradicts everything else we have said in your bankruptcy petition, so I don’t want to have you sign unless there is a really compelling reason.

In the past couple of days I have received proposed reaffirmation agreements from (the bank holding the second mortgage) and from (the credit union holding the car loan). The (agreements are) attached …….

The thing with (the credit union with the car loan) is simple.  If you don’t sign it they will probably repossess your car.  So my advice as to that one is you better go ahead and sign it.  I would call that a compelling reason.  The time frame on that is that they have 60 days from the date of our ….. hearing (or meeting of creditors) to get it filed with the court.  What I would like to do is sit down with you, go over it and get your signature on all the right signature lines on it when I see you on (the date of the meeting of creditors); and then I’ll take care of sending it back to (the credit union).  They won’t do anything nasty if they have it in time to get it filed before the discharge, which is 60 days after the hearing.

As to (the bank holding the third mortgage), my advice is the exact opposite.  (Under Minnesota Law )They can’t foreclose as long as you keep making the payments.  The law (in Minnesota) concerning cars is way different from the law concerning homes.  The worst consequence (In Minnesota) of not reaffirming is that they won’t report your payments to the credit bureaus.  You can deal with that problem by keeping good records of your own so you can prove the payments have been made.  I just spoke with …….., the person whose name is on the letter that came with the reaffirmation agreement.  She says it is likely that (the bank holding the second mortgage) will resume sending monthly statements if they get a letter from me asking for that after the case has been discharged.  I will plan on doing that when that time comes.  I just put a note to myself on the front of your file to remind myself. 

We will no doubt go over all this and discuss it when I see you on …….. – after we’re done with the hearing.  There’s a conference room we can probably use at the courthouse, or we can go to the coffee shop on the main floor and talk there.

For now be sure you continue to make your car payments and the payments on both mortgages.  These creditors might stop sending monthly statements, but that doesn’t mean you don’t have to pay.  If you still want to keep the house and keep the car, you have to make the payments.  Every now and then I have a client who gets behind in the payments because the monthly statements stopped.  Don’t let that be you. 

Creditors like this usually resume sending statements after the discharge, either on their own or in response to a request.  After a bankruptcy the statements usually look a little different.  Somewhere on the bill they will say something like “We know you don’t owe this any more but we thought we would send this in case you still wanted to pay.  This is not an attempt to collect a debt.” 

Of course once you reaffirm (with the credit union holding the car loan) you will owe the debt again, so  their statements will look like they always did.

I didn’t get into it with this client, but the main reason I hate reaffirmation agreements is that they tend to defeat the whole purpose of the bankruptcy, which is to make debts go away and stay gone.  Even with a car loan, where technically the creditor does have a right to repossess just because the debt was not reaffirmed, I try to avoid having my client sign.  I make it my practice to call the lender and ask what they will do if my client does not reaffirm but continues to make payments.  If a reliable person speaking on behalf of the lender says the lender doesn’t  care about the reaffirmation as long as the payments continue to be made, I will tell  my client that I think he or she can get along without the reaffirmation and my advice is don’t sign it.

I found myself inserting “in Minnesota” several places above, because I want it to be clear that what I am saying may not apply in another state.  While bankruptcy is based on a federal statute that is supposed to apply nation wide, the law incorporates and relies a lot on local laws and local practices.  If you are not a resident of Minnesota, please ignore and do not rely on anything said here.  You need to consult a lawyer in your own state and your own community about matters like this.

This post is for general information purposes only, is not legal advice and does not create an attorney-client relationship. Please consult the attorney of your choice concerning the details of your case.

 

 

Recent Purchases Before Filing for Bankruptcy

When filing for a Chapter 7 bankruptcy, many debtors are concerned about the status of large or luxury purchases they may have made in the weeks or months before filing.

These purchases may have been for expensive jewelry, cars, boats, or other items. Whether these items can be retained by the debtor after filing for bankruptcy depends on the nature of the item and how and when it was purchased.

Credit Card Purchases

The trustee in a Chapter 7 bankruptcy will look to any major purchases you made in the past 90 days or even beyond in some cases. Also, a creditor may challenge your use of their credit card if it can show that your actions indicated an intent to not repay them.

For example, if you bought a $2,500 bicycle on your MasterCard three months ago and made no payments before filing, the creditor is very likely to file an objection to the discharge of that particular debt.  You will be accused of intending to run the debt through bankruptcy at the time it was incurred.  “Fraud” is the term the bankruptcy code uses to describe this behavior.   The creditor’s objection will be likely to prevail.

For some large items bought on a particular credit card, you may have unwittingly signed a purchase money security agreement. In this situation, the creditor could claim title to the item and demand you either return it, pay the current market value of it, or make monthly payments.

Reaffirmation and Redemption

For other expensive purchases made with cash, you may or may not be able to retain the item. Your assets and debts make up your estate. According to law, you have certain assets that are exempt from seizure by the trustee and assets that are nonexempt. Your exempt property is usually protected only up to a certain amount. For example, most states allow a limited homestead exemption regarding your equity. You can also exempt one automobile valued up to a certain amount.

 Automobiles and boats

If you just purchased an expensive car for cash, it is unlikely you can keep the vehicle since its market value will likely exceed the exempt amount.  Under the Minnesota exemptions, you can claim one car of a value up to $4,600;  or if you choose to use the federal exemptions, which are also available in Minnesota, you can claim up to $3,450.00 of equity in a vehicle as exempt.  So with the exemption being lower, why would you choose the federal exemptions?  Because the federal exemptions also include a wild card exemption which you can use for anything up to $11,975.  Excess equity in a car, or anything else that doesn’t fit in one of the specific categories, can be claimed as exempt under the wild card.  If you have assets that you are unable to exempt, however, you can expect the trustee to seize them unless you have the ability to buy the assets back from the trustee.

If you have a loan on the car, some of the lenders will require that you reaffirm the debt with a reaffirmation agreement as a condition of allowing you to keep the vehicle.  Most of the lenders, however, will let you just keep making the payments without a reaffirmation – a procedure called retain and pay.  A reaffirmation agreement is a contract which reinstates the loan as if the bankruptcy never happened.  Such agreements are to be avoided if at all possible.  Since 2j005 the bankruptcy code has not included retain and pay as one of the options, but most lenders will do it anyway.  Another option, one  which is still in the bankruptcy code, is redemption.  Redemption means paying in one lump sum – the full value of the vehicle or other security.  There are a few lenders out there who will finance redemptions, at a very high interest rate, but in general this is rare.

There are no specific exemptions for boats.  If the boat is a very modest one, you might be able to exempt it with the wild card.  Unless you can use the wild card, the trustee will likely sell any boat, and that money will go to the trustee and the creditors.  The best thing to do with a boat is usually to sell it before filing the bankruptcy – for fair market value of course.  You can use the proceeds to hire your lawyer.

Jewelry

Most states have a jewelry exemption.  Under Minnesota statutes the only jewelry exemption is for wedding rings  – up to $2,817.50.   The federal exemptions exempt $1,450 of any kind of jewelry. Your attorney will ask to determine the liquidation value of the jewelry, or how much you could get if you sold it.  A formal appraisal may be needed.  In some cases, the liquidation value is considerably less than what you paid for it and it may fit within an exemption.

If you bought the jewelry on credit and the creditor has a perfected security interest in the item, it could demand you return it or continue making payments. Taking legal action against you and then selling the item is generally an expensive process. In many cases, the creditor may agree to work out a payment arrangement or you could pay the redemption value in one lump sum.  Typically a payment plan would be written up as a reaffirmation agreement.

Reaffirmation agreements have to be filed with the court prior to the date of discharge for them to be legally enforceable.  This means the window during which they can be done is quite narrow.

If you have non-exempt jewelry, as with any asset that is non exempt, you can negotiate with the trustee to buy back the jewelry, if no security interest exists on it, once you determine its resale value.

In any of these scenarios, it is best to consult with a bankruptcy attorney before you file for Chapter 7 protection and to see if a Chapter 13 is more applicable or some other financial option is available.  The bankruptcy code is a mine field of “gotchas,” and it’s not a place you want to go without a lawyer.

The author of this article resides in Minnesota, and the references to exemption laws are intended only to apply to Minnesota residents.  The exemption scenario is different in every state; and if you are not from Minnesota, it could be very different in the state where you live.

This article is intended for general information purposes only and it not intended to be legal advice

Eligibility Requirements for Filing a Chapter 7 Bankruptcy Petition

Debt Relief, MN Bankruptcy

Debt Relief, MN BankruptcyIf you are one of many people across the country who are suffering from more debts and obligations than your budget can seem to handle, you are probably thinking about seeking the protection of a Chapter 7 bankruptcy. Like most, you may also be wondering if there are specific rules or regulations that determine your eligibility to file a petition.

In order to file a petition for a Chapter 7 bankruptcy, you need to meet certain conditions defined within the bankruptcy codes. To begin with, your level of income must fall below a specific amount, and if so, you next have to pass another set of eligibility standards called the ‘means test’. However, the bankruptcy laws also state that the bankruptcy court can dismiss your petition if you have previously filed for bankruptcy during a specific length of time. The bankruptcy court can also dismiss your petition if feels you might be defrauding your creditors.

In previous bankruptcy laws prior to 2005, the judge presiding over the case could dismiss any Chapter 7 petition if you had enough disposable income to finance a Chapter 13 Bankruptcy repayment schedule to your creditors. With the new bankruptcy laws in effect, there are much clearer guidelines that determine if you will be allowed to remain in Chapter 7 bankruptcy, or if you might be required to petition for a Chapter 13. Only disabled veterans who have built up debts while on active duty, and people who have taken on too much debt because of a struggling business are allowed to submit an uncontested Chapter 7 petition.

These new guidelines for filing a Chapter 7 petition begin by determining how your ‘current monthly income’ amount compares to a standard or ‘median’ income level, and is it also based on your particular household size in your state. This amount is also calculated by averaging your total earnings during the previous six months prior to filing your petition. If your earnings happen to fall below or are equal to this median amount, you will certainly be able to qualify for a Chapter 7 petition.

On the other hand, if your earnings are above this median figure, then you must meet the next challenge by passing the ‘means test’ required in the up-dated bankruptcy guidelines. The means test is used to find out whether you have enough disposable income, after deducting living expenses and other debts like child support or alimony for instance, to repay your creditors over a three to five year repayment plan in a Chapter 13 petition. These guidelines were designed to keep people with higher levels of income from filing for a Chapter 7 bankruptcy.

The new bankruptcy laws also state that you may not file a Chapter 7 petition if you have already received a discharge of your debts in a Chapter 7 case within the previous 8 years, or in a Chapter 13 within the previous 6 years. In addition, you cannot file if either a previous 7 or a 13 was dismissed anytime within the previous six months because you violated a court order, you committed any fraudulent activities, or you dismissed your case because a creditor sought relief from the protection provided by the automatic stay.
Finally, the bankruptcy court can also have your case dismissed if it is felt you attempted to commit fraud against your creditors, or tried to conceal your assets or personal property from the bankruptcy court in order to avoid the liquidation process. The liquidation of your assets is necessary so that the court-appointed trustee on your case can repay as much of your unsecured debts as possible to your creditors.

It is important to remember that simply because you qualify under the means test guidelines does not mean you should automatically file a petition for a Chapter 7 bankruptcy. The test is only intended to confirm that you are eligible to file. Any decision to file for Chapter 7 bankruptcy should be made only after considering all other options and possible alternatives, and only after discussing these options with knowledgeable and qualified bankruptcy attorney.

If your would like to know more about Chapter 7 Bankruptcy and your Eligibility, Call David Kelly Today at: 952-544-6356

Or Fill Out Our Online Contact Form

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