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From Executive Director

Reaffirmation in a Chapter 7 bankruptcy is where you agree to continue to pay certain secured debts. It is very important and can have a major impact on you after your bankruptcy is over.

What Is Reaffirmation

Reaffirmation is when you agree to pay debt(s) that would otherwise be discharged in bankruptcy. Simply stated, reaffirmation is when you have a reaffirmation agreement with one or more of your creditors which says that, even though you filed bankruptcy, you promise to pay your creditor(s) the same as if you had not file bankruptcy.

Reaffirmation Affects You After Bankruptcy Is Over

Reaffirmation is not applicable with unsecured debts. You can continue to pay them after the bankruptcy if you want to, but there is no reason or advantage to promise to pay an unsecured debt after bankruptcy. (As aside, if you want to pay an unsecured debt after bankruptcy, simply pay it when you can, but DO NOT promise to pay, DO NOT make regular payments, and DO NOT write or sign any written statement stating your intention to pay.)

But reaffirmation is very important with secured debts. To understand why reaffirmation is important, you need to understand how secured debts such as car and home loans are treated if you do not file bankruptcy.

Without bankruptcy, if you fail to pay a secured debt, your creditor can seek to repossess the secured property, and, depending on your state’s laws, seek a deficiency judgment against you if the sale of the property does not cover your debt to your creditor. For example, if you owe $10,000.00 on your car loan, your car is repossessed and sold for $6,000.00, then the car lender can seek a deficiency judgment against you for $4,000.00.

With bankruptcy, if you keep the secured property without a reaffirmation agreement, your secured creditors are limited to only repossessing the secured property. In the same example, only this time you have filed bankruptcy, if you owe $10,000.00 on your car loan, your car is repossessed and sold for $6,000.00, then the car lender can not do anything else. The car lender cannot seek a deficiency judgment against you.

With bankruptcy reaffirmation on a particular debt, it is as if you did not file bankruptcy on that particular debt. If you fail to make the required payments, the secured property can be repossessed and, depending on your state’s laws, your creditor may seek a deficiency judgment against you. In the above example, your car lender would be able to seek a deficiency judgment against you for  $4,000.00.

So, why would you reaffirm any debt(s)? Because that may be your only option to keep the secured property.

Your Options For Debts/Loans Secured With Property

When you file bankruptcy under Chapter 7, you have to state what you intend to do about each debt. With secured debts such as home and car debts, your choices are to (1) reaffirm the debt, (2) pay the debt off and keep the secured property, or (3) surrender to your creditor the secured property. There is a fourth option that may or may be available to you, depending on your state’s laws.

(1) Reaffirm debt as discussed above.

(2) Pay the debt off and keep the secured property.

This really is not much of an option unless you owe very little on the debt and the secured property is of little value. With most car loans and home loans, the payoff is so high that, if you had the money to payoff the loan, you would not be filing bankruptcy. Occasionally, people have loans secured by other property such as furniture, the payoff is low, the value of the property is low, and it is worth and possible to payoff the loan.

(3) Surrender or give up the secured property.

With this option, you simply give the secured property to your creditor. Your creditor cannot do anything else and the debt is discharged in bankruptcy.

(4) The fourth possible option is to pay and keep.

This fourth option is not specifically mentioned in the bankruptcy code and some bankruptcy Courts will allow you to use it while other bankruptcy Courts will not allow you to use it.

If the bankruptcy Court will permit you to use this option, then the effect of this option really depends on your state’s laws. With this option, you simply keep paying the required payments and keep the secured property. You would think that if you make the required payments and are current with your payments, your creditor could not repossess the secured property. That is true is some states where you have to be behind in your payments for a creditor to have the legal right to seek possession of secured property.

However, in some other states, even though you are current with your payments, the fact that you filed bankruptcy may allow your creditors to seek possession of the secured property. And your state’s laws may treat secured debts on personal property, such as car loans, differently than secured debts on real property, such as home loans. Your creditor may be allowed to seek possession of a car even if you are current, but not be able to seek possession of your home as long as you are current with the payments.

Most creditors just want their money and will not take any action to repossess secured property as long as the creditors are being paid, but it is not true of all creditors.

Some creditors will seek possession of secured property simply because they can, but they will allow you to keep the secured property if you reaffirm your debt to the creditor. Remember, if you reaffirm a secured debt and then fail to pay the payments, the creditor can repossess the secured property and seek a deficiency judgment against you.

Reaffirmation Agreement

If you decide that you do want to reaffirm a debt, you will need to file a reaffirmation agreement with the bankruptcy court. Remember, reaffirmation is voluntary. Even though a creditor may allow you to keep secured property only if you agree to a reaffirmation agreement, there are no laws that require you to reaffirm a debt. You must file a reaffirmation agreement within 60 days after the 341 meeting of creditors date.

For your protection and to try to make sure that a reaffirmation agreement is in your best interest, if you are represented by an attorney, the attorney must certify that the reaffirmation does not impose an undue hardship on you or your family and that you have been informed of the legal effect and consequences of the reaffirmation agreement. If you are not represented by an attorney, then there must be a hearing in the bankruptcy Court and the Judge must approve the agreement
unless the debt is secured by a lien on your real property.

As further protection, you can rescind and cancel the reaffirmation agreement by (1) giving the creditor notice that you are rescinding the agreement, and (2) you give the rescission notice to the creditor at any time prior to the bankruptcy discharge or within 60 days after the agreement is filed with the bankruptcy Court, which ever time is later.

Because reaffirmation affects you after your bankruptcy is over and because both the bankruptcy Court and state laws have a big impact on whether or not reaffirmation is in your best interest, be sure to talk with a lawyer experienced in bankruptcy in your state before agreeing to a reaffirmation agreement.

This is general information only. If you have any questions whatsoever, talk with a lawyer licensed in your state who has experience with Chapter 7 bankruptcy, Chapter 13 bankruptcy, or bankruptcy in general.

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