Chapter 7 Reaffirmation of Debt or Chapter 13

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In Chapter 7 there is a process that is called Reaffirmation of the debt. The law requires that you do one of three things regarding secured debt, Reaffirmation, Redemption (paying the value of the item), or Surrender of your secured property. Reaffirmation occurs when you wish to retain secured property. In the reaffirmation process, you enter into an agreement with the creditor, whereby you tell the creditor that you want to keep your property and the creditor either says, you can keep the property or you cannot. This is a voluntary process between the Debtor and the Creditor. There is a popular misconception that you can file a bankruptcy and keep your secured property. This is simply not true.

The problem with this process of reaffirmation is that should you reaffirm the debt and find out that after the mandatory 60 day cooling off period that you cannot make the payments you are in worse shape than before the bankruptcy, because you will still lose the car and you have no bankruptcy protections for 4 to 8 years.

On the other hand, should you have filed a Chapter 13 petition the secured property that you wished to keep would have been valued and you would have paid the value of the vehicle and/or the loan balance (depending on the date of purchase) over an extended period of time plus an interest rate of Prime plus 1 to 3 Percent. Why is this important, usually because the Chapter 13 payment will be in line with your car payment.

What does this mean? It means that should you file a chapter 13 plan and keep your car, you will be paying less for the car than you would pay in Chapter 7, and should you be unable to pay for the car in Chapter 13 you will still be able to discharge the debt in Chapter 7. You can file a Chapter 7 after filing a Chapter 13, but you cannot always file a Chapter 13 after filing a Chapter 7.

I like to call this the insurance policy of filing a Chapter 13 petition. In short, should you wish to retain property, you should always consider Chapter 13, but if you want a totally clean start you should consider Chapter 7.