Reaffirmation of Debts

Posted on Sep 10, 2015 By Ed Woods

Attorney Ed WoodsWhen you file a Chapter 7 bankruptcy case and you owe debts that are secured by collateral, you must indicate what you want to do with that collateral. Your basic choices are to either keep possession and use of the collateral or to walk away from the collateral and let the creditor have it. For example, suppose you have a car note that you haven’t finished paying yet. The car is the collateral for the debt. So, in a Chapter 7 case, you must tell the bankruptcy court whether you want to keep the car or you want to walk away from it.

If you decide to walk away from the collateral, you “surrender” it back to the creditor which effectively turns that creditor into an unsecured creditor. This means that all you lose is the car. The creditor cannot come after you for any balance remaining on the account after they sell the car for its fair market value. So, you eliminate the debt you owe on the car but you also lose possession of it.

Reaffirmation Agreement

If you want to keep the car, one available option is to enter into a “reaffirmation agreement” with the creditor. Entering into a reaffirmation agreement with the creditor allows you to keep the car. Further, you usually continue to pay the same monthly payment on the car that you paid before you filed your Chapter 7 bankruptcy case. Sounds pretty good, right?

Well, not so fast. The legal effect of a reaffirmation agreement is to exempt the debt you owe on the car from the bankruptcy discharge you get at the end of your case. In other words, you still owe the full balance of the debt even after your bankruptcy case is over. As long as you pay your car note on time each month, you’re okay. But what if you enter into a reaffirmation agreement that has, for example, three years to go and you run into trouble before the three years is up? In that circumstance, not only can the creditor repossess the car from you but the creditor can also sue you for the remaining balance on the account after they sell the car. Your previous bankruptcy case will not protect you from this situation because you signed the reaffirmation agreement. So, you should think long and hard before you sign a reaffirmation agreement.

Retain and Pay

You may be thinking, “Why not just keep paying for the car but not sign a reaffirmation agreement?” This option is sometimes called “retain and pay”. Although the bankruptcy law does not specifically provide for this option, the law does not forbid it either. Some creditors will continue to accept your monthly payments and allow you to keep your car without signing a reaffirmation agreement. Others insist on a properly entered reaffirmation agreement as a condition to you keeping your car. The main benefit to you with the “retain and pay” option is that you keep the car AND you avoid being responsible for the full amount of the debt should you run into trouble later. But with this benefit comes some risk. The risk is that you might lose the car in the future because you never entered into a reaffirmation agreement with the creditor. The “retain and pay” option may seem to be working at first and then suddenly your car is repossessed.  The bottom line is that there is simply no way to be sure if the “retain and pay” option will ultimately work for you and that is the risk you take. So, you have to ask yourself if you are willing to take that risk. Ultimately, only you can make this decision for yourself.

Redemption of Collateral

Entering into a reaffirmation agreement is not the only way you can retain possession of collateral if you are in debt trouble. Chapter 7 allows for a “redemption” of the collateral which means you simply pay the cash value of the collateral to the creditor. However, the payment must usually be in a lump sum and that may be impossible in your circumstances. Another option might be to file your case under Chapter 13 instead of Chapter 7. Filing your case under Chapter 13 allows you to avoid the reaffirmation agreement scenario altogether. Either way, your best bet is to consult with a reputable and experienced debt relief lawyer to learn about all of your options.