Filing Chapter 7 bankruptcy doesn’t mean you have to give up your car and home if they are collateral for a loan. The debtor and the creditor can sign a reaffirmation agreement which will allow the debt to survive the bankruptcy discharge. If the debt is reaffirmed, after the bankruptcy the debtor continues to make payments each month and the creditor doesn’t repossess or foreclose on the property.
Reaffirmation agreements are voluntary. Creditors don’t have to agree to sign a reaffirmation agreement. However, if a creditor fails to sign a reaffirmation agreement on a house they still cannot pick up the vehicle if the debtor continues to make payments. The same rule doesn’t apply to vehicles. If the car loan isn’t reaffirmed then the creditor can pick up the vehicle in Texas. However, this is seldom in the best interest of the creditor. Cars depreciate, and as a result creditors are seldom reimbursed for the full value of their claim if they pick up the vehicle and attempt to get reimbursed from the sale of the property. Because of this fact most lenders are happy to sign a reaffirmation agreement and if no agreement is signed they will not pick up the vehicle if the debtor continues to make payments.
Reaffirmation agreements have to be filed with the court for approval. The bankruptcy judge makes sure that the reaffirmation is in the best interest of the debtor and that they can actually afford the debt they are trying to exclude from discharge. If it appears from the terms of the agreement and the income and budget information provided in the schedules that the debtor cannot afford the terms in the agreement, the judge will require the debtor to come to court and explain why he is reaffirming the debt. If the debtor can’t give a good explanation the judge will usually deny the reaffirmation agreement and the debt will be discharged.