Re-Affirmations in a Chapter 7

Much has been written already about reaffirmation agreements and this blog will not cover any new ground, but will provide a quick explanation for potential bankruptcy clients.

A reaffirmation agreement is a contract entered into during the pendency of (usually) a Chapter 7 bankruptcy case which stops the particular debt from being discharged. In other words, it creates an obligation to repay that debt after the bankruptcy case is completed.

Is reaffirming a debt a ever a good idea? This is a tough question to answer.

Typically, only secured debts are reaffirmed in order to allow the debtor to retain the collateral. Under the amendments to the Bankruptcy Code which took effect in 2005 (BAPCPA), secured creditors can treat the filing of the bankruptcy as a default and use that as a basis to repossess their collateral (such as an automobile) after the bankruptcy case is over, if applicable state law allows it. As a result, the only sure way to keep a secured motor vehicle or other personal property is to enter into a reaffirmation agreement.

However, there is a big downside to reaffirmation agreements, namely that if you fail to make the required payments, not only can the creditor repossess its collateral, but the debtor will also owe whatever is left on the balance of the reaffirmed debt. It is for this reason, among many others, that most attorneys advise against doing reaffirmation agreements.

There are a few saving graces, however. First, as far as vehicles go, the majority of vehicle creditors will allow debtors to just stay current and maintain their payments without entering into a reaffirmation agreement. Second, there is at lease an argument to be made for merely attempting a reaffirmation agreement and if the judge denies it, then the debtor should be able to retain the collateral and make payments because they have done all that is required of them by the bankruptcy code.

There may be reasons to reaffirm smaller debts, such as with credit unions in order to retain future credit privileges with them, but as always you need to get advice on your specific situation from your bankruptcy attorney.