Wednesday, March 9, 2011

To Reaffirm or not to Reaffirm

In chapter 7 bankruptcy cases, debtors are required to file a document called a “Statement of Intention” for any property which is the collateral for a debt that is not covered by any bankruptcy exemptions.  The Statement of Intention lists three options for each such piece of property:

i. Surrender
ii. Redeem
iii. Reaffirm

This article focuses on the “Reaffirm” option and provides a brief overview on reaffirmation and its consequences.

Generally speaking, “reaffirming" a debt means basically treating it as if it is unaffected by the bankruptcy filing.  A reaffirmation agreement is one between a debtor and a creditor whereby a debtor agrees to pay back the debt associated with a piece of property securing that debt, and, in exchange, gets to keep that property.  The most common reaffirmed debts are for automobile loans and home mortgages.  The main reason individuals would reaffirm a debt is because they desire to keep the property associated with that debt.  However, if they are behind on certain payments, such as mortgage payments, reaffirmation in chapter 7 is not an option and they may have to file under chapter 13 in order to pay back arrears and retain their homes.

The main consequence of reaffirmation is that individuals are still liable for the debt reaffirmed, and the bankruptcy discharge they receive will not affect the debt.  Thus, if they reaffirm a car loan, receive a bankruptcy discharge, but then subsequently miss their car loan payments, the vehicle can be repossessed and the lender can sue for the deficiency.  Reaffirmation agreements must be filed and meet the requirements of the bankruptcy court.  Essentially, they must have entered into the reaffirmation agreement voluntarily and by binding themselves under the agreement, they must not be creating an undue hardship for themselves and their family.

There is a presumption that a reaffirmation agreement is creating an “undue hardship” if, after paying the debt, one's monthly net income is negative.  The presumption can be overcome if:

i. The debtor will have assistance making the debt payments by another source; or
ii. If the debtor had to give up that particular piece of property, it would create an even greater hardship.

It is recommended that you speak to your bankruptcy attorney to decide whether reaffirmation is an option and in your best interests.