Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Bankruptcy and reaffirmed debts

Dear Dr. Don,
I filed a Chapter 7 bankruptcy in 2000. I was told that my house and car were never reaffirmed. I am not sure what this means. Am I still responsible for paying for my home and car, or have they been included in the bankruptcy???
Toni Triage

Dear Toni,
When filing for bankruptcy, you list all of your debts in the bankruptcy petition. In a Chapter 7 filing the bankruptcy court will discharge all eligible debts. If you chose to reaffirm a debt, then that debt will survive the bankruptcy discharge. Unsecured creditors will seek to have you reaffirm a debt so the obligation won't be discharged by the bankruptcy court. The bankruptcy judge has to sign off on a debt reaffirmation agreement if you didn't have a lawyer representing you on your case.

The following is from the U.S. Courts pamphlet, Bankruptcy Basics (p. 16):

If the debtor elects to reaffirm the debt, the reaffirmation should be accomplished prior to the granting of a discharge. A written agreement to reaffirm a debt must be filed with the court and, if the debtor is not represented by an attorney, must be approved by the judge.

11 U.S.C. § 524(c). The Bankruptcy Code requires that reaffirmation agreements contain an explicit statement advising the debtor that the agreement is not required by bankruptcy or nonbankruptcy law. In addition, the debtor's attorney is required to advise the debtor of the legal effect and consequences of such an agreement, including a default under such an agreement. The Code requires a reaffirmation hearing only if the debtor has not been represented by an attorney during the negotiating of the agreement. The debtor may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists.

Homes and cars are usually financed as secured debt. That means that the lenders have a security interest in the home or car. While bankruptcy can eliminate your obligation to repay the mortgage or the auto loan, the lender continues to have a security interest in the car or home. Without reaffirming the debt, the car and house are likely to be sold so the lenders can attempt to recoup their loans.

It's a little odd that two years after the bankruptcy filing you don't have a handle on whether you have to continue making payments on your car loan and your mortgage. If the debts were discharged then you don't have to continue to make payments, but you lost use or possession of the assets. If the debts were reaffirmed, then you would continue to make payments and have use of the assets. Talk to either your bankruptcy attorney or the bankruptcy court to get an understanding of your position regarding these debts.

-- Posted: Oct. 23, 2003