Reaffirmation Agreements in Bankruptcy

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News | by — September 6, 2013

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First, the disclaimer: The article below is for informational purposes only. It is not designed, nor is it intended to offer specific legal advice or create an attorney-client relationship. If you want that, you’ve got to meet with us.  

 

Reaffirmation in Bankruptcy

If you file a bankruptcy, and owe money to a secured creditor, that creditor will likely ask you to sign a reaffirmation agreement.  But, what is a reaffirmation agreement? And should you sign one?

First, let’s start with the basics.  A secured creditor is one that could repossess an asset if you stop making payments. This is most commonly your auto or home lender, but other secured creditors may include those from furniture, appliance or jewelry purchases.

When you buy something with financing, you give the secured creditor two things.  First, you give the creditor a contract or promissory note agreeing to pay a certain amount of money.  Second, you give the creditor a security interest in the item you are purchasing; the “asset”. This security interest is what allows the creditor to repossess the asset if you stop making your payments.

When you file a bankruptcy, the contract or promissory note gets discharged along with your other dischargeable debts, such as credit cards. This means that you no longer have any personal liability for the loan balance. But, the security interest remains. Therefore if you wish to retain the asset, you must continue to make your regular monthly payments.

So what is a reaffirmation agreement?

A reaffirmation agreement, if approved and entered by the bankruptcy court, brings the promissory note or contract back, as if the bankruptcy never happened with regard to this specific debt.

Should I reaffirm my secured debt?

Whether or not to reaffirm a debt is a question that must be answered on an individual basis. The paragraphs below provide some general information regarding certain common reaffirmations, and the potential pros and cons.  It should not be construed as legal advice.

Vehicles:

Once you receive a discharge of your debts, you will no longer be liable for the loan balance on the vehicle, unless you have reaffirmed the debt.  Regardless of whether the debt has been reaffirmed, if you want to keep the vehicle, you will have to continue to make regular payments.

Most lenders will ask you to reaffirm the debt. Some lenders will allow you to keep the car without reaffirming, so long as you continue to make your payments.  However, some will repossess if you do not reaffirm, even if you are current on your payments.

If you have not reaffirmed the debt (or if you have tried and the bankruptcy court did not approve the reaffirmation) then you have no personal liability for the loan balance. Continue to make your payments so long as you want to keep the car. Under these circumstances, if you ever needed or wanted to give the car back to the lender, you could do so without having the pay the remaining loan balance.

If you have reaffirmed the debt, it is as if the bankruptcy never occurred with regard to that creditor. Depending on the creditor, it may opt to continue reporting your timely payments to the credit reporting agencies, it may offer you other extensions of credit or conveniences such as sending coupon books or offering automatic payments.  Under these circumstances, you remain personally liable for the entire loan balance and if you are unable to pay it, the creditor can repossess the vehicle and sue you for a deficiency balance.

Homes:

Mortgages are secured by property. The Oregon bankruptcy court has a history of refusing to sign off on reaffirmation agreements for mortgages. If you intend to keep your home, you must make sure to make your complete mortgage payment, on time, every month.

 

 

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