Chapter 7 bankruptcy allows you to discharge overwhelming debt, helping you reach financial freedom. Also referred to as liquidation bankruptcy, Chapter 7 erases your debt by writing off much of your medical expenses, credit card debt and other unsecured loans.
As a result of filing for Chapter 7, you risk losing certain property items, such as your home or vehicle. There are ways, however, that you can keep your property and resume making payments on your loans.
How loan reaffirmation works
Rather than discharge your loan and have your property repossessed by the lender, you may choose to reaffirm your loan, according to the U.S. Courts. This means that you renew the loan contract with the financial institution, making an agreement that you will continue paying on the loan even after your bankruptcy is discharged.
In some cases, the lender will assist you in making loan payments by lowering the interest rate or reducing your monthly payment. Since the financial institution would rather have you resign the contract than lose the loan, they often pass these savings onto you.
Things to consider before reaffirming a loan
Loan reaffirmation is not for everyone. Depending on your situation, it may be more effective to get out of the loan, and then start over once the bankruptcy is finalized. Make sure you consider the following before resigning with the lender:
- Can you afford to continue making payments?
- Do you need to keep the property or is it something you can do without?
- Can you replace the item for less money?
By making the decision that is best for you, you can avoid getting yourself into a similar situation where you are forced to deal with overwhelming finances.