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Reaffirming Debts in Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, if some of your debts are secured by property that you wish to keep, like your vehicle or home, reaffirming those debts is one strategy which may allow you to hold on the property. This article discusses the process of reaffirming debts in Chapter 7 bankruptcy, and some frequently asked questions regarding reaffirmation. As always, be sure to consult with a Albuquerque bankruptcy attorney if you have any additional questions regarding reaffirmation, or bankruptcy in general.

In general, you may only reaffirm a debt if the property which secures the debt is in fact exempt. If the property does not qualify as exempt, a bankruptcy trustee is probably going to choose to sell the property to raise funds to pay your creditors; the trustee also receives a percentage of the amount recovered by the bankruptcy estate.

Reaffirmation AgreementWhat is Reaffirmation of Debts?

By reaffirming a debt, you are essentially agreeing that you will continue to owe the debt once your bankruptcy case is over has concluded. Your personal liability for the debt, as well as any creditor’s lien on the collateral securing the debt, will survive your filing for bankruptcy. In essence, in the end it will be as if you had not filed for bankruptcy in the first place with regard to reaffirmed debts- they will not go anywhere.

As an example, imagine you owe $25,000 to the car dealership who sold you your vehicle before you even file for Chapter 7 bankruptcy. If you reaffirm that debt during your bankruptcy proceedings, you will owe the same $25,000 (provided you have not paid it down during the bankruptcy case) when your case concludes. However, the silver lining is that you will get to keep your car, rather than having it repossessed and sold to pay your debts, or having to surrender the vehicle.

Keep in mind, though, that if you do not keep up with your car payments and the car does get repossessed, you will then owe the creditor the difference between how much you reaffirmed, and how much the car is sold for. In most cases, the car will be sold for much less than what you owe, leaving you to pay a considerable amount of money. This situation is referred to as a “deficiency balance,” and almost all states (including New Mexico) allow creditors to file suits for deficiency balances on property that has been repossessed, when the initial purchase price was lower than a few thousand bucks.

What Are the Advantages of Reaffirmation?

By reaffirming your debts in bankruptcy, you will be securing your property provided that you comply with all the terms of your reaffirmation agreement, especially keeping up with payments. This might not sound as good as having a debt discharged completely, but it is a good solution for keeping property which is attached to debts that are not dischargeable at all. Also, reaffirmation creates an environment in which you might succeed in negotiating new terms with your creditors to either reduce your interest rate or payments, or even reduce the overall amount you owe.

Are There Any Disadvantages of Reaffirmation?

Because reaffirmation will render you once again personally liable for the debt in question, you will not be able to just walk away from this debt once your bankruptcy case is over. You will continue to be legally obligated to pay the deficiency balance, even when the property has been lost, destroyed, or damaged. Also, since you will need to have to wait at least eight years before you may again file for Chapter 7 bankruptcy, you will effectively have to live with that particular debt for years.

For example, if you were to reaffirm a motorcycle loan, and then you subsequently defaulted on the payments after your bankruptcy case was over, that creditor could (and most likely would) repossess the motorcycle, sell it at auction, and send you a bill for the deficiency balance- the difference between what you owed on the motorcycle, and how much the creditor got for it at auction.

For example, imagine Neil owns a laptop worth $800, and he still owes $1,000 on it. Neil reaffirms this debt during bankruptcy, and two months later he spills coffee on the laptop and ruins it.  Even though Neil no longer has a working computer, he nonetheless owes the laptop creditor $1,000 because he reaffirmed the debt.

Are There Any Restrictions on Reaffirmation?

There are some restrictions on reaffirmation of debts in bankruptcy. Though reaffirmation can be done with any sort of property and any sort of creditor’s lien, a creditor must actually agree to the terms of a reaffirmation. In some cases, the terms will be different than the agreement originally entered into by the debtor and the creditor, and they will need the creditor’s approval before the debt can be reaffirmed.

Either you or the creditor will need to file the reaffirmation agreement with the bankruptcy court during your bankruptcy case. Unless you are represented by an attorney, the reaffirmation agreement will need to be reviewed by the bankruptcy court during a discharge hearing or reaffirmation hearing. During the hearing, the bankruptcy judge will go over your bankruptcy paperwork to determine how the reaffirmation could affect your budget after bankruptcy, and whether you will truly be able to make the payments you have promised to make. If the judge finds that you are unlikely to be able to afford the payments, he may choose to reject the reaffirmation agreement. A reaffirmation agreement is likely to be rejected if it appears that you will be unable to make payments after paying for your monthly living expenses or other debts, or if the property is worth far less than what you still owe on it.

When Should Affirmation Be Used?

Reaffirmation brings with it a harsh reality of leaving you in debt even after the conclusion of your bankruptcy case. So, you should consider using reaffirmation only when:

  • the creditor has insisted upon it
  • it is the only method by which you can keep collateral that you seriously need to hang on to, and
  • you’ve got good reason to believe that you will in fact be capable of paying off the balance after your bankruptcy case concludes.

With some kinds of property, reaffirmation may be the only logical way to retain the property. Reaffirmation can also be a practical way to hold on to property that is significantly higher in value than what you still owe on it. If you do decide to enter into a reaffirmation agreement for one or more of your debts in bankruptcy, you should try to get your creditor to accept an amount less than what you currently owe as complete payment. You should not reaffirm any debt for an amount higher than what it would cost you to simply give the property up and then replace it. In some circumstances, a debtor can redeem property by paying for its fair market value; the debtor who redeems, take the property free of liens.

You Must Keep On Top Of Payments After Reaffirmation

If you do reaffirm a debt so that you can retain certain property, you must be sure to stay on top of your payments after bankruptcy. This will allow you to remain on the good side of the creditor, who may have actually done you a favor depending on the content of the reaffirmation agreement.