When Should I Keep a Debt After Filing Bankruptcy?

Bankruptcy is an excellent way to get a fresh financial start, so it's surprising that some clients ask if they can continue to pay a debt after the case is filed. Most of the time clients ask because they want to continue to do business with a certain bank, or because they want to keep a specific asset like a car or a home.

Of course, you can always make voluntary repayment after the bankruptcy ends.

You also have the legal option to "reaffirm" a debt in bankruptcy. This means that the debt is not discharged, and if you fail to pay it the creditor can sue you or take other action. Because this goes against a fresh start, reaffirming a debt is not always a good choice.

What you can (or should) do depends on the type of debt and whether it is unsecured, secured by personal property, like a car, or secured by real estate, such as a home.

Unsecured debts that people may want to continue paying are typically either credit cards with a preferred bank or medical bills with a trusted doctor or clinic. For example, credit unions will often cancel accounts if a person causes them a loss in bankruptcy.

We almost always recommend against reaffirming an unsecured debt. In many cases, if you voluntarily repay the credit union you can rejoin, so reaffirming the debt is not necessary and puts you at financial risk if you are later unable to pay. Medical providers are usually understanding and will be willing to continue to work with you.

For debts secured by personal property, such as a car, reaffirming can make more sense, as long as the payment is affordable for you. If you do not reaffirm, your lender technically has the right to repossess the vehicle even if you continue to make payments. This is not a common practice, but it is important to be aware of the possibility. In most cases, if you do not reaffirm but continue to make the payments, the lender will accept them as normal.

The real impact of your decision comes if you end up falling behind on the payments. If you do not reaffirm the debt, the lender can repossess your car, but nothing else. If you do reaffirm the debt, they can repossess the car and also sue you for any deficiency balance owed, so you end up paying for a car you no longer have.

For debts secured by real estate, such as your home, we usually recommend against reaffirming the debt. As long as you make your mortgage payments, the lender cannot foreclose, even if you do not reaffirm. If you don't reaffirm, your lender will likely not report your payments (or missed payments) to the credit bureaus, but that's a small consideration.

The problem with reaffirming is that it increases your overall risk, in the event that you fall behind on the loan later on. If your home is foreclosed upon, and sells for less than you owe, you may be on the hook for the deficiency, and the amount can be very large. The likelihood of this happening is low, but the potential size of the deficiency is a good reason to avoid reaffirming a mortgage debt.

You'll want to discuss any debts you'd like to reaffirm with your attorney. In many cases, you're better off not reaffirming the debt, but each situation is unique and reaffirming may be the best option, especially for assets you plan to keep.

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