One of the least understood benefits of Chapter 13 is the superior manner in which secured creditors are handled compared with Chapter 7. In a Chapter 7, if you want to keep your car that you owe money on, you are required by the bankruptcy code to sign what is called a “Reaffirmation Agreement.” By signing this document, you are essentially giving up your right to discharge this debt in the bankruptcy or in any subsequent bankruptcy.
That may not seem like a big deal. You may be thinking, “I didn’t file bankruptcy to get out of paying my car loan anyway”. It was to get out from under my credit cards or other debts. But what happens if 6 months after you complete the bankruptcy, you lose your job and can no longer afford the car payment? Or what happens if the car breaks down? Well if you had filed a Chapter 7 and “Reaffirmed” the debit, you are stuck. Not only can the creditor repossess the car, but they can sue you for the balance still owed on the car.
On the other hand, if you file Chapter 13, you do not have to sign a Reaffirmation Agreement. In fact, there is no such thing as a Reaffirmation Agreement in Chapter 13. In Chapter 13, you simply pay for the car as long as you can afford it. If at some point you were to lose you job or otherwise become unable to afford the car payment, you could simply give it back and then convert your case to Chapter 7 and discharge the debt on it. Also, if the car was purchased more than two and a half years before the filing of the bankruptcy, you only have to pay the value of it in full, with the balance becoming an unsecured debt.