Most people file for Chapter 13 bankruptcy in order to keep their house, car, or other property because there are more tools available to save your property under Chapter 13 than there are under Chapter 7. However, in Chapter 7 bankruptcy, it is still possible to keep property that secures a debt by reaffirming the debt. A knowledgeable bankruptcy lawyer can help an Alabama resident decide whether to reaffirm a debt and file for Chapter 7 bankruptcy, or whether filing for Chapter 13 is more appropriate in the particular situation.
You often can keep a piece of property by reaffirming your debt when you file for Chapter 7 bankruptcy. This means you agree you will still owe the debt even after your bankruptcy case is over. The creditor’s lien on the collateral as well as your personal liability for the debt will survive bankruptcy, just as if you had not filed for it.
Usually, you can reaffirm debt for a particular piece of property only if your equity in the property is mostly “exempt.” Unlike some other states, Alabama has its own exemptions and has opted out of the federal bankruptcy exemptions. Therefore, you must use Alabama’s exemption system to protect your property if you file for bankruptcy in this state. In Alabama, you can exempt a piece of real property worth up to $5,000 and up to 160 acres including a house or mobile home. You also have a wild card exemption of up to $3,000 in any personal property besides wages, which many people apply to motor vehicles. In addition to considering the amount of equity that can be exempted, a skilled bankruptcy attorney may also consider the costs of selling the property and repairing the property in determining whether someone would lose it in a Chapter 7.
To reaffirm the debt, your equity in the collateral must not be so high that a Chapter 7 Trustee could sell it, pay you for your exemption and still have a substantial amount left over to pay something to your creditors. It is important that you assess this with the help of an experienced bankruptcy attorney. For example, if you have a car worth $15,000 if sold at an auto auction, and you still owe $5,000, you then have $10,000 of equity in your car. Your wildcard exemption will only cover $3,000 out of the $10,000, leaving $7,000 the Trustee could use to pay toward your debts. Therefore, the trustee will probably want to sell the car. An experienced bankruptcy attorney should help you understand the real boundaries of what you can keep in a Chapter 7.
As long as you abide by the terms of the reaffirmation agreement, reaffirmation can allow you to keep property that would otherwise be repossessed. However, reaffirmation also keeps you personally liable for a debt that would otherwise be discharged through the bankruptcy process. You have to wait eight years to file another Chapter 7 bankruptcy again, so if you owe a significant amount on a piece of property and cannot pay it off, there is no way to get that debt discharged once it has been reaffirmed. You should use reaffirmation if it is the only way to get the creditor to let you hold on to a piece of property that you truly need and if you have solid grounds to believe you will be able to pay off the amount you reaffirmed.
When you reaffirm a debt, you or your creditor must file the agreement in court as part of your bankruptcy. A judge can reject a reaffirmation agreement if it appears that you will not be able to make the payments that you have agreed to make once you pay necessary expenses. An experienced bankruptcy attorney can make a big difference to reorganizing your finances in the Montgomery area and your ability to get a reaffirmation agreement approved. Grainger Legal Services represents clients throughout South-Central Alabama from our offices located in Montgomery, Prattville and Troy. Call us at (334) 260-0500 or contact us online to schedule a free consultation.