Reaffirmation Agreements in Chapter 7 Cases
We have noticed a growing trend of individuals seeking to “reaffirm” some of their secured debts in Chapter 7 cases. For those of you who are new to the topic of bankruptcy, the debtor in a Chapter 7 liquidation case may have the option to validate certain secured debts, like home mortgages and car loans. That is, if you really want to keep your home and/or vehicle, the law says that you may be able to “reaffirm” those debts by signing a Reaffirmation Agreement with your creditors.
I have several concerns about Reaffirmation Agreements, which I will express in this edition of our bankruptcy blog. But first, it should be made known that you, as a debtor, DO NOT have an absolute right to reaffirm your secured debts. There are some misconceptions in the public domain, however, I want to make it clear that reaffirmation is voluntary by both the debtor and the creditor. A good rule of thumb is that a secured creditor will most likely entertain a reaffirmation agreement if you are current on your payments. However, the pitfall is that most people filing bankruptcy are in arrears on either their home mortgage, car loan, or both.
If you have filed, or are contemplating, a chapter 7 bankruptcy please consider these factors before requesting and signing a reaffirmation agreement. First, at the time of the bankruptcy filing are you able to make the monthly payments required under the original loan documents. You cannot assume that the bank is willing to negotiate your payments. Typically, reaffirmation agreements require you to pay the full monthly payments that were required under the original terms of your loan. Second, do you reasonably anticipate being able to complete all payments under the terms of the loan agreement. Once a Reaffirmation Agreement is approved by the bankruptcy judge, that debt is not discharged and you are married to that debt for the remainder of the loan.
For those who were in mortgage foreclosure proceedings prior to the bankruptcy filing, do not assume that the bank will be any more likely to work with you on a loan modification after signing the Reaffirmation Agreement than they would be if you discharged the debt and went to mediation afterwards. On the contrary, the bank has less incentive to give you any concessions if they know that you are already agreeable to repayment of the loan under the original terms. As we will discuss in a later blog, certain districts are ordering mediation in Chapter 13 cases, requiring banks to review modification requests within the bankruptcy context, which is far more stringent than in a state court.
To close the subject, please think carefully before reaffirming any debts in a chapter 7 case. Consult with your lawyer and make sure you are crystal clear on the ramifications before reaffirming any debts. Food for thought: If you struggled to pay certain debts before filing bankruptcy, do you think it will get easier to come up with the same amount of money every month after your bankruptcy is over.
