“A” Is For Contract Assumption

gimme a!Bankruptcy eliminates contracts as well as debts.

An “assumption” occurs when a debtor agrees to continue performing obligations under a contract or lease. When a debtor files for bankruptcy protection from creditors, not only are debts eliminated, but so are the underlying contracts. Think about it. Your credit card is based on a contract for extension of credit. Remember that credit card application? When you buy a car or get a cell phone you need to sign a contract. Purchasing a house with a mortgage loan? That’s right. You signed a contract to pay the note back at the closing.

To assume or not to assume…That is the question.

Some contracts are secured by collateral, like a house or car, and some aren’t, like a typical credit card. A debtor must list their intentions regarding these debts. There are only two choices: assume or reject the agreement. Most all debts and contracts are rejected. Some are kept. The most common contract or lease assumption is for auto loans. Most auto lenders will repo your car if you don’t sign an agreement assuming, or keep, the debt. The terms are usually the same as the purchase but sometimes the debtor can negotiate more favorable terms.

A debt I never encourage a debtor to assume is the home mortgage.  Basically, you don’t need to. Your house will not be foreclosed if you don’t assume the debt. You remain the owner. Just keep making payments and you can stay in the home. You may want to change your mind and walk away from the house in the future. Don’t lock yourself in by assuming a house loan. Definitely don’t sign a second or third mortgage note especially if your house is upside-down.

Why would you want to assume that?

The one debt that every debtor usually agrees that they will not assume is a credit card. Why in the world would you agree to repay one of those? After all, didn’t you file bankruptcy to get rid of those? Some filers get nervous though that they will never get another credit card again. It may surprise you, but most of my clients get credit card offers in the mail about the same time they get their discharge. I know. It sounds crazy but it’s true. I can’t think of a single good reason why someone would assume a credit card debt.

“A” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people Downriver  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, read The Bankruptcy Book.

 

Comments

  1. I agree with you when you say “Just keep making payments and you can stay in the home.” As a fellow attorney who helps consumers with mortgage mods in addition to doing consumer bankruptcies, I welcomed the clarification to the Home Affordable (HAMP) regulations that say the homeowner/debtor does not have to be “behind” on their mortgage to apply for a mod. This is as true for a Chapter 7 as it is for a Chapter 13.
    But the sad truth is that a bankruptcy alone will not reduce mortgage payment. These are secured debts and they must be paid in the bankruptcy without reduction.
    This is why a Chapter 7 or 13 in combination with a HAMP can be such a potent weapon for the debtor/homeowner. Not only can the qualifying debtor have their debt discharged but they can also reduce their mortgage payment (including escrows) often drastically while in bankruptcy. The same effect can be achieved without bankruptcy if the latter is not required which of course has a lessened impact on credit. For additional information see my Mortgage Mod Page at: http://christopherccarr.law.officelive.com/MortgageModification.aspx

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