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Reaffirmation

Whether or not to sign a reaffirmation agreement is often one of the most important decisions to be made in a Chapter 7 case.

If you have given up collateral in exchange for a loan, you will probably be dealing with reaffirmation during your case. Creditors holding collateral, such as auto lenders, are called secured creditors.

When we file a Chapter 7 case, we are seeking a discharge order. The discharge order eliminates your personal liability to repay all of your debts (with very limited exceptions, such as student loans). The discharge order does not affect the collateral for the secured loan.

Reaffirmation is a method of excluding a debt from the discharge order. Now, why would you want to do something like that?

You might want to exclude a debt from your discharge when you are seeking to retain collateral, such as a vehicle. In some cases, reaffirmation may be the only way to hold on to the collateral.

Without a reaffirmation agreement, the secured creditor may have the legal right to take back or repossess its collateral, even if the loan payments are current.

When the loan terms are reasonable, and there is little doubt that the client will have the financial means to repay the loan in full, reaffirmation may be advisable. Making regular payments on a reaffirmed secured loan can help in reestablishing credit.

However, reaffirmation can be a serious risk, because the client’s liability for a reaffirmed loan survives the bankruptcy. If the client defaults on the loan after the bankruptcy, the consequences of reaffirmation are devastating. The secured creditor can repossess the collateral, sell the collateral at an auction, and sue the client for any deficiency (the remaining balance due on the loan after applying the sales proceeds).

Therefore, all Chapter 7 clients, but especially those with high interest secured loans, should think long and hard before signing the reaffirmation agreement.

Now, you are probably wondering: Is there any other option, other than reaffirmation, for keeping my car or other collateral? Fortunately, the answer is often yes. Secured creditors often want to use repossession as the last possible resort. Most likely, a creditor will not want to take the collateral when it is receiving regular payments, even when the underlying loan was discharged in the bankruptcy. Maintaining regular payments without signing the reaffirmation agreement will allow the client to later default on the loan, with the only consequence being the repossession of the collateral. The creditor will not be able to sue the client for money.

With some exceptions, maintaining regular payments on a secured loan, without signing the reaffirmation agreement, may be the best way to treat the loan in bankruptcy.

We want to make sure that you are aware of your options regarding reaffirmation. We will always discuss reaffirmation as part of the initial consultation. Please contact us for further information about this important issue.

Peter Berk