What are “Reaffirmation Agreements” in Chapter 7 Cases?

  Most people enter into Chapter 7 in order to get rid of unsecured debts like credit card bills, medical debt or repossession deficiency claims.  What happens if you need to file Chapter 7 but you want to keep your current motor vehicle or house?  Does Chapter 7 allow you to keep secured debts such as car loans or mortgages while discharging unwanted unsecured debt?

  The answer, thankfully, is “yes.”  You can keep your wanted secured debt by reaffirming that debt.

  Reaffirmation is a process set out in the Bankruptcy Code whereby you re-obligate yourself for a secured debt.  Reaffirmation gives you the certainty of knowing that you can keep your house or car, and it provides protection to your secured creditors as well.

Reaffirmation Agreements are Contracts

  When you meet with your Clark and Washington lawyer, you will be asked about debts that you want to reaffirm.  Think carefully about the obligations that arise from reaffirmation.  Although you do have 60 days to change your mind after signing a reaffirmation agreement, once the reaffirmation “goes permanent” you will be obligated to pay the reaffirmed debt as if you had never filed bankruptcy.  If you reaffirm a car loan, and later default, the car lender can repossess the vehicle and sue you for a deficiency.  If you reaffirm a mortgage and later default, you can find yourself in foreclosure.

Reaffirmation is not Automatic

  You may want to reaffirm a secured debt like a house or vehicle but your creditor has to agree as well.  Generally secured creditors are agreeable to reaffirm as long as you are current at the time of reaffirmation and you have a decent payment history.  However, your creditors are not required to enter into a reaffirmation agreement with you.  If you have had a rocky payment history, you should discuss with your Clark and Washington lawyer whether there could be a problem with reaffirmation, and whether Chapter 13 might be a better option.

  Reaffirmation is also subject to to the question of whether you have excess equity in your property that might interest your Chapter 7 trustee.  This issue usually does not arise but it could be an issue if you have a lot of equity in your home or vehicle.

The Reaffirmation Document

  Since the changes to the bankruptcy laws in 2005, reaffirmation agreements have changed greatly as well.  Pre-BAPCPA, reaffirmation agreements were typically 1 or 2 pages of mostly boilerplate language.  Now, the Bankruptcy Code requires extensive disclosures and assertions by both the debtor (you) and counsel (your lawyer) that the reaffirmation is truly in the debtor’s best interest and that the secured debt payment is affordable.  Do not be surprised when you see a reaffirmation agreement that consists of 10 pages or more.

  Reaffirmation hearings before the judge are generally not required if you are represented by an attorney.  If you proceed pro se, you will have to go before the judge to explain why the reaffirmation agreement is doable for you.

  Finally, the Bankruptcy Code no longer allows you to straddle the fence and do nothing.  If you do not reaffirm a debt, the Code provides that your lack of action is equivalent to a rejection of the secured debt contract.  Thus, if you have secured debts in Chapter 7, you must either reaffirm the debt or reject it and thereby give up the collateral.