Those of you filing chapter 7 bankruptcy will face the decision of whether to reaffirm your secured debts, which are typically just your home mortgage and car note. Your attorney knows full well that you need a car to get to and from work, and don't want to move. So therefore we want you to sign that reaffirmation agreement on those items, right? Maybe, but probably not.
"But if I don't sign that reaffirmation agreement then I will lose my house and my car," you are probably thinking. Not necessarily.
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Reaffirmation means that, in return for the right to keep property or to receive credit in the future, you agree to re-obligate yourself to pay a debt you would not otherwise be required to pay after bankruptcy. However, if you owe more on the debts than the property that secures the debt is worth, you may not want to agree to reaffirm for the full amount of the debt, because you could go out and buy the same merchandise, house, or car for less money. Why would you want to come out of bankruptcy with a car that is worth $10,000, but you owe $25,000?
Some secured lenders will continue to accept your monthly payments and allow you to keep the collateral even if you haven't indicated intent to reaffirm your debt. This is known as the Retain and Pay option, which is an informal option not explicitly recognized by the Bankruptcy Code, but not specifically forbidden by it either. The risk you must assume with this option is a lack of certainty or predictability. Some car lenders will repossess vehicles unless you timely reaffirm the debt. Other lenders feel that it is better to receive monthly payments under the informal "retain and pay" option rather than lose money by selling repossessed vehicles at auction prices.
If you can live with this risk, it may be better to not reaffirm a debt if you are not behind in your payments or otherwise in default. Since creditors are usually more alert to technical defaults after a bankruptcy, with this option you must make certain that you maintain full coverage insurance at all times, pay taxes, make all payments on time, etc. You may request that creditor send regular statements to you even if you do not reaffirm.
Unless there is a decent amount of equity in the home, mortgage reaffirmations do not provide a significant advantage. By signing the reaffirmation agreement, you are voluntarily deciding to have your largest debt survive the bankruptcy. In the event that some financial disaster occurs to you or your family in the future, you will not be able to walk away from this debt due to the signing of the reaffirmation agreement. As long as you stay current on your payments, though, that should not cause you any problems as the mortgage company does not have the right to foreclose on a property as long as you stay current.
If you reaffirm a debt you are placing yourself in the same, or a worse, position with respect to the debt than you were in before you filed bankruptcy.
1. You must pay a debt that you are not legally obligated to pay;
2. If you default, the property securing the debt may be repossessed and you may be subject to a deficiency judgment;
3. If you default, your wages, bank account, or property may be garnished;
4. If you default, your credit will be further damaged;
Reaffirmation agreements MUST be filed before the date you receive your order of discharge of debts from the court.
Peter Bricks is a bankruptcy attorney who practices with The Bricks Law Firm in Atlanta, Georgia. He is licensed in the State of Georgia and the District of Columbia. The Bricks Law Firm is a debt relief agency proudly assisting consumers in filing bankruptcy. However, there is no attorney/client relationship with the reader of this article unless there is a fee agreement. Your situation is unique to you, and Peter Bricks and/or The Bricks Law Firm would need to consult with you individually before we could offer you applicable and accurate legal advice. This article should only be used for educational purposes.
An index of all articles on The Bricks Law Firm website can be found at:
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