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What is a Bankruptcy Reaffirmation?

What is a Bankruptcy Reaffirmation?

Legally, “a bankruptcy reaffirmation agreement under federal statutes refers to an agreement made between a creditor and the debtor that waives discharge of a debt that would otherwise be discharged in the pending bankruptcy proceeding. A properly executed, timely filed reaffirmation agreement modifies the discharge such that it is rendered inoperable against the debt.” In more simple terms, you are able to reaffirm for the debt to remain after the bankruptcy is over in order to maintain the property attached to such debt i.e. a car, house, and property. All legal codes pertinent to the reaffirmation process are codified under 11 U.S.C. § 524(c).

All reaffirmations of debt are taken on a voluntary basis and are not a requirement for completing a bankruptcy case. Once a reaffirmation is filed, all property included within the reaffirmation maintains the original creditor’s liens, conditions for payment, and the debtor’s personal liability for the debt.  In other words, the loan and all its conditions will be reestablished under the reaffirmation as if the bankruptcy did not occur. It is possible in some cases to re-negotiate the amount owed or other payment terms under a reaffirmation agreement.  However, the renegotiation process can take a long time and runs the risk of the case being discharged and closed under the court’s deadlines without a reaffirmation agreement ever being signed and filed.

What happens if I can’t make the payments under the Bankruptcy Reaffirmation?

If you have reaffirmed, but cannot afford to make the payments for any reason then the property can be repossessed by the lender. In most cases of repossession you will be required to pay the difference between the reaffirmed amount due and the amount the property is sold for (usually in an auction). This amount is known as the deficiency balance, and most instances the creditor may sue the debtor to collect this amount. This is by far, the most common issue with automobiles that have been reaffirmed and subsequently repossessed. On the other hand, some states do not allow for the collection of a deficiency balance on repossessed property if the purchase price is under a fixed amount. Therefore it is necessary to consult with an attorney to determine if the creditor/ lender has a legal right to pursue a deficiency balance on repossessed property.

What are the advantages of a Bankruptcy Reaffirmation?

The primary advantage to a reaffirmation is that it enables you to retain your property so long as you agree to maintain the original promised payments, without fail, despite the issuance of a bankruptcy. A reaffirmation may also provide you with the ability to negotiate payments for reduction, negotiate a new interest rare, or develop a new payment play for paying off the debt overtime.

What are the disadvantages of a Bankruptcy Reaffirmation?

Reaffirmation has the disadvantage of making you liable for the debt despite the debt potentially being discharged under the bankruptcy. Once a reaffirmation is signed and filed with the court, you are now once again responsible for the debt and will be expected to pay it. Even if the property in question is irreparably damaged, stolen or destroyed you will still be required to pay the balance of the loan. Furthermore, you may be stuck with the reaffirmation for at least another eight (8) years, the length of time before another bankruptcy discharge may be granted.  Therefore, if you reaffirm a debt, you will be required to repay the debt for a long time despite financial hardship.

Are there restrictions on a Bankruptcy Reaffirmation?

Reaffirmations may be permitted on most types of properties that involve liens.  This includes, but is not limited to: real estate mortgages, computers, automobiles, tools, boats, jewelry and other expensive luxury items. On the other hand, a reaffirmation may only be entered for an item if the creditor agrees to the terms of the reaffirmation, which may be exactly like the original terms of the loan or different if agreed. If a new agreement is reached then either the lender or the debtor may file the a reaffirmation agreement outlining the new terms in the bankruptcy case. A bankruptcy judge will have the final discretion on whether or not to approve or reject the terms of the reaffirmation agreement. Judges may deny your reaffirmation for any of the following reasons:

1) the bankruptcy court feels that the reaffirmation is not in your best interest,

2) the bankruptcy court feels that the reaffirmation would create unnecessary hardship,

3) the bankruptcy court feels that you are not financially be able to afford the reaffirmation payments, or

4) the bankruptcy court feels that you will owe significantly more in the debt reaffirmed than the estimated worth of the property.

While our experience is that the court frequently approves the vast majority of reaffirmations, there is always the risk a reaffirmation may be denied if it is obviously unfair to the barrower.

When Should I use a Bankruptcy Reaffirmation?

You should only consider and use reaffirmation in the following situations:

  • It is the only way you are able to retain the property that you need to keep out of necessity.
  • You believe that it is possible for you to repay the balance owed in a reasonable amount of time.
  • The creditor / lender insist that you use a reaffirmation to maintain the property.

In most cases, individuals use reaffirmation as a last resort to maintain necessary property such as an automobile or home. If you do decide to reaffirm a debt it is possible to renegotiate your original payment terms to make it easier to afford. You should avoid reaffirmation if the property is replicable and / or if the debt significantly exceeds the value of the property. It is important to note that you should not seek a reaffirmation if you do not think that you can remain current on all future payments. Failing to make payments on reaffirmed property places you at high risk of the creditor repossessing the items.

If you are seeking a Chapter 7 bankruptcy and believe that you wish to retain properties; such as, your home or vehicle please call 770-609-1247 to speak to one of our experienced and caring bankruptcy attorneys at Coleman Legal Group LLC. Our staff are experienced with many facets of bankruptcy law and will be able to assist you in the filing and resolution of your bankruptcy claim.

Content Revised: 2015-12-09