Reaffirmation Agreements: Keeping Secured Property in Bankruptcy
When individuals file for bankruptcy, particularly Chapter 7 bankruptcy, they often face a crucial decision regarding their secured debts: whether to reaffirm these obligations or let them go.
Reaffirmation agreements play a vital role in this process, allowing debtors to keep certain secured property by agreeing to continue paying the associated debt.
This article delves into the intricacies of reaffirmation agreements, their implications, and the factors to consider when deciding whether to reaffirm a debt.
What is a Reaffirmation Agreement?
A reaffirmation agreement is a legally binding contract between a debtor and a creditor that reestablishes the debtor’s obligation to repay a debt that would otherwise be discharged in bankruptcy.
By signing a reaffirmation agreement, the debtor agrees to continue making payments on the debt as if the bankruptcy had never occurred. This agreement typically applies to secured debts, where the creditor has a lien on specific property, such as a car loan or a mortgage.
The Process of Reaffirming a Debt
- Negotiation: The process often begins with negotiations between the debtor and the creditor. Sometimes, creditors may offer more favorable terms, such as a lower interest rate or reduced balance, to encourage reaffirmation.
- Agreement Drafting: Once terms are agreed upon, the creditor drafts the reaffirmation agreement, which must comply with specific requirements outlined in the Bankruptcy Code.
- Review and Signing: The debtor reviews the agreement, often with the assistance of their bankruptcy attorney. If the debtor decides to proceed, they sign the agreement.
- Attorney Certification: If the debtor is represented by an attorney, the lawyer must certify that they have advised the debtor of the legal effects and consequences of the agreement, including the risk of default.
- Court Filing: The signed agreement is filed with the bankruptcy court before the discharge is entered.
- Court Approval: In some cases, particularly if the debtor is not represented by an attorney or if the payments appear to impose an undue hardship, the court may need to approve the agreement.
Key Considerations for Debtors
- Affordability: Can the debtor realistically afford the payments under the reaffirmation agreement? Defaulting on a reaffirmed debt can lead to repossession or foreclosure, and the debtor would still be liable for any deficiency.
- Property Value vs. Debt: Is the property worth more than the outstanding debt? If the property is underwater (worth less than the debt), reaffirmation may not be financially prudent.
- Necessity of the Property: How essential is the property to the debtor’s daily life or ability to earn income? A car might be crucial for commuting to work, while a luxury item might be less necessary.
- Alternative Options: Are there other options available, such as redeeming the property for its current value or negotiating with the creditor outside of bankruptcy?
- Impact on Fresh Start: Will reaffirming the debt hinder the debtor’s ability to achieve a fresh financial start post-bankruptcy?
Pros and Cons of Reaffirmation
Pros:
- Allows the debtor to keep important secured property
- Can help rebuild credit by demonstrating ongoing payment history
- May lead to improved loan terms through negotiation
- Avoids immediate repossession or foreclosure
Cons:
- Creates a continuing legal obligation that survives bankruptcy
- May strain the debtor’s post-bankruptcy budget
- Limits the full benefit of the bankruptcy discharge
- Risk of future default and liability for deficiency
Special Considerations for Homes and Cars
Homes:
Reaffirming a mortgage is less common and often unnecessary. Many lenders allow debtors to keep their homes as long as they stay current on payments, even without a reaffirmation agreement.
However, without reaffirmation, the lender may not report ongoing payments to credit bureaus.
Cars:
Vehicle loans are more frequently reaffirmed. Many lenders require reaffirmation to avoid repossession, even if the debtor is current on payments.
However, if the car is worth significantly less than the outstanding loan, reaffirmation might not be advisable.
The Role of the Bankruptcy Court
Bankruptcy courts play a crucial role in overseeing reaffirmation agreements to ensure they are in the best interest of the debtor.
If the court believes the agreement poses an undue hardship or is not in the debtor’s best interest, it may decline to approve the agreement.
This is particularly likely if the debtor is not represented by a bankruptcy attorney or if the payments seem disproportionate to the debtor’s income.
Alternatives to Reaffirmation
- Redemption: Paying the creditor the current value of the property in a lump sum to keep it.
- Surrender: Giving up the property and discharging the debt.
- Ride-Through: In some jurisdictions, debtors may be able to keep property without reaffirmation by staying current on payments, though this option is not universally available.
Conclusion
Reaffirmation agreements offer a path for debtors to retain important secured property through bankruptcy, but they come with significant responsibilities and risks.
Debtors must carefully weigh the benefits of keeping the property against the ongoing financial obligation and its impact on their fresh start. Consulting with an experienced bankruptcy attorney is crucial in navigating the complexities of reaffirmation and making informed decisions that align with long-term financial goals.
Ultimately, the decision to reaffirm a debt should be made with a clear understanding of its implications and a realistic assessment of one’s ability to meet the ongoing obligations.
Where Can I Find Help?
Dealing with bankruptcy doesn’t have to be a single-person job. The bankruptcy lawyers at Parker & DuFresne will help you determine the best course of action to help you get out from under your debt and move forward to a debt-free future.
Call today at 904-733-7766 for a free consultation, or click the button at the top of the page to schedule online.
