A Reaffirmation Agreement is an agreement that Chapter 7 debtors may sign to reassume personal liability for secured debt and keep the collateral. Most often Chapter 7 debtors will reaffirm debt for their car, boat, rv, or other high-value personal property.
Filing a Chapter 7 bankruptcy petition breaks all contracts the debtor had previously. Signing and filing a Reaffirmation Agreement re-creates the contractual relationship between creditor and debtor. Usually, the debtor must be current on the loan, although debtors’ attorneys have succeeded in rolling small amounts of loan arrears into the balance of the Reaffirmation Agreement. In many cases, it may not be worth it to reaffirm a debt unless the creditor offers you some benefit such as a lower interest rate.
What Does Reaffirm Mean?
Normally, a Chapter 7 debtor is discharged of debt and the secured lender can repossess a car or boat or other property (called “the collateral”) once the bankruptcy case closes, or sooner if the lender files a Motion for Relief from the Automatic Stay with the Bankruptcy Court. In many cases, however, the lender will not seek to repossess the collateral if you are up to date on the payments.
In order to keep the collateral, a debtor reaffirms the debt by signing a new contract reassuming personal liability for mortgage or car debt. This overrides the discharge and the debtor remains liable for this debt following the entry of the discharge order and the closure of his or her bankruptcy case. You should speak with your lawyer to find out if reaffirmation is right for you.
Usually, the terms of the Reaffirmation Agreement will mirror the terms of the original loan, and that is why it may not always be a good idea to sign them. Some debtor’s attorneys have been successful in negotiating more favorable terms, such as a lower interest rate.
Reaffirmation Agreements and Bankruptcy Exemptions
In order to retain the collateral and sign and file a Reaffirmation Agreement, the attorney for the Chapter 7 debtor must creatively apply exemptions to any equity the debtor has in the collateral to protect the collateral from the seizure and sale by the Chapter 7 Trustee for the benefit of creditors.
Is a Reaffirmation Agreement Necessary?
Entering into a Reaffirmation Agreement is always wholly voluntary. However, since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“the Act”) was passed into law, Chapter 7 debtors wishing to retain any collateral securing debt are supposed to file a Reaffirmation Agreement to definitively prevent lenders from repossessing the collateral after the bankruptcy case closes.
Why? Because most secured loans contain a clause providing that filing bankruptcy itself violates the contract between lender and debtor. While this is a point of frequent litigation, from a lender’s point of view the act of filing bankruptcy and a discharge of the underlying debt reduces the lender’s available remedies if the debtor later defaults on payments.
All a lender can do at that point is repossess the collateral and sell it. Most of the time collateral sells at auction for far less than the debtor owns on the loan, but absent a Reaffirmation Agreement the lender can no longer pursue the debtor for any account deficiency because that debt has been discharged, meaning, the debtor no longer is personally responsible to pay that debt.
The upshot is, even if a Chapter 7 debtor remains up to date on monthly payments, if the debtor does not sign and file a Reaffirmation Agreement the lender is sometimes free to exercise the right to repossess the collateral under the Act once the bankruptcy case closes and anytime thereafter regardless of whether the debtor is current on payments, or not. This is why you need to discuss the specific facts of your case with your attorney to see if Reaffirmation is appropriate for you.
How Long Do You Have to File a Reaffirmation Agreement?
A Reaffirmation Agreement must be filed within 60 days after the first scheduled 341(a) Meeting of Creditors. This deadline may be extended by the Bankruptcy Court.
What Happens When You Reaffirm a Debt?
Once a Chapter 7 debtor executes a Reaffirmation Agreement, the lender or the debtor’s attorney files it with the Bankruptcy Court and the Court schedules a Reaffirmation Hearing.
What Happens at a Reaffirmation Hearing?
A debtor and his or her attorney appear at the courtroom of the judge assigned to the debtor’s Chapter 7 case. The hearing may be in person or held remotely, especially since the onset of Covid-19. The judge will ask the debtor questions about his or her finances in order to determine whether entering into the Reaffirmation Agreement is in the debtor’s best interests. The judge’s primary concern is whether the debtor can realistically afford to make the monthly payments going forward.
A Chapter 7 debtor should consider carefully whether the monthly payment is affordable, because if it is not and the debtor fails to make payments, the lender then has the right to foreclose or repossess and also the right to sue for the account deficiency, since the Reaffirmation Agreement overruled a discharge of that debt. In many cases signing a Reaffirmation agreement may not be the best move and you need to discuss the same with your lawyer.
What Happens if I Do Not Sign a Reaffirmation Agreement?
If you do not sign a Reaffirmation Agreement when the secured creditor sends you one, you run the risk of having the collateral repossessed following the closure of your Chapter 7 Bankruptcy case.
What Happens if You Do Not Reaffirm a Mortgage?
Probably nothing if you keep current on your mortgage payments.
If a debtor reaffirms a mortgage and continues to make monthly mortgage payments, the lender will report the account as current to the credit bureaus. However, as a matter of practice, most mortgage lenders do not send debtors a Reaffirmation Agreement to sign.
There is little risk that the lender will foreclose on the debtor’s property as long as the debtor makes monthly mortgage payments timely and in full. Foreclosure is an expensive procedure for mortgage lenders, so as long as you keep current on the mortgage you should be able to stay in the house.
If you do not reaffirm a mortgage and at some point in the future you can no longer afford to make monthly mortgage payments, you can walk away from the property with no personal liability for the mortgage because you received a discharge of that debt.
Can I Sell My House if I Did Not Reaffirm?
Yes, you can. You are still the record owner of the property, and if you did not reaffirm you are not personally liable for the mortgage. The property could be sold for less than what you owe (short sale) and you would not be liable for the deficiency on your account, but this would require the approval of the mortgage lender.
Can I Trade in My Car After Reaffirmation?
Yes, you can trade your car in as long as your new loan pays off the balance of your previous loan.
Can I Cancel a Reaffirmation Agreement?
Yes, you have 60 days to rescind a Reaffirmation Agreement, if the court approved it but you subsequently changed your mind.
Does Reaffirming Help Credit?
Yes! The lender will report your loan as current to the credit bureaus. If you do not reaffirm, the lender does not report payments you make in many cases, so making monthly payments without a Reaffirmation Agreement may not help rebuild your credit following your Bankruptcy case.
Should I Reaffirm? Can I Reaffirm?
If you are considering filing bankruptcy but are concerned about whether you should reaffirm any secured debt, or whether the collateral you want to keep has too much equity to reaffirm, contact an experienced bankruptcy attorney to schedule your free consultation. To be forewarned is to be forearmed! Knowledge gives you power to do the right thing.