Reaffirmation

Let’s talk “reaffirmation agreement”. What is it? Why should I be concerned with it? How does it work?

David Kingsbury Law OfficeReaffirmation is a process in bankruptcy by which you re-obligate yourself to pay on loans, usually where there is security or collateral involved and you’ve like to keep that collateral. Basically what is happening is that you are signing new paperwork generated by the creditor that will be filed with the bankruptcy court. If the judge issues an order approving the reaffirmation agreement in your case the loan is still in force notwithstanding the bankruptcy filing

We are usually talking about vehicle loans here in most consumer bankruptcy cases.  Mortgages on real estate are also sometimes involved in reaffirmation agreements. Some creditors would like debtors in bankruptcy to reaffirm on unsecured debts, such as second mortgages (where the value of the property is upside-down…read worth less than what is on the first mortgage), credit card debts and other unsecured lines of credit/signature loans.

Some bankruptcy attorneys will vehemently not allow their clients to reaffirm on anything. Their rationale is that if for whatever reason the debtor cannot repay the renewed obligation in the future then the debtor is now stuck with a debt that they could have discharged in the bankruptcy case but didn’t due to the reaffirmation agreement. Here is how it works for secured debt. Creditors that own a loan where there is collateral,your car for instance,have 2 things securing their loan. First is the security interest in the car. If you don’t pay they get to repossess. That isn’t a bankruptcy concept. That is standard contract law. The second thing that protects them is your “personal guarantee” to pay the debt by virtue of the “note” that you signed when you took out the loan. Here is where bankruptcy law comes in. When you file bankruptcy the security interest is not discharged. It passes through a bankruptcy unaffected by the bankruptcy discharge. So, if you don’t pay they still get to repossess the car.

David Kingsbury Law OfficeHowever, your personal liability to pay on the note, the “personal guarantee”, is discharged. So, if they take they car that’s all they get is the car and you don’t owe anything else. They have to be satisfied with just getting the car back. Let’s change it around. Let’s say you reaffirm on the car loan. Six months later you lose your job and can no longer make the payments or perhaps the transmission goes out and it isn’t worth fixing. The lender repossess the car. Result, you owe the balance on the loan since you reaffirmed the debt. Which is why some attorneys do not allow their clients to reaffirm on debt of any sort.

The way things used to work with car loans in bankruptcy was that we’d have our clients do what we referred to as a “ride through”, or also called the “stay and pay” option. That basically meant just keep making your payments and keep your insurance on the vehicle and under state contract law the lender couldn’t repossess if you didn’t reaffirm on the auto loan in your bankruptcy case. With the new bankruptcy laws in 2005 that all changed. The automobile lender lobby is a strong one and they got a provision enacted in the new bankruptcy code that basically states that if you don’t reaffirm on the loan that they can repossess the vehicle whether you are current or not. Not quite fair but the Federal Bankruptcy Law takes precedence over state contract law. So most debtors in bankruptcy cases feel quite a bit of pressure to reaffirm on auto loans especially.

We take a moderate approach to reaffirmation as a consequence of the new legislation. Prior to its enactment we discouraged our clients entering into those agreements. Currently we don’t have a flat out “no reaffirmation agreements at all–ever” policy in this office. If it is a vehicle and our clients need it to get to work and back, etc., then we certainly take a look at it. If the vehicle is relatively close in value to the loan balance and the payment isn’t exorbitant then chances are that a judge will have no problem signing the order to approve the agreement. We are required to “certify” the reaffirmation agreement, which basically means that we attest that the agreement does not impose an undue hardship on the debtor or his/her family. Simply put if it is reasonable then we can make it work. If it’s unreasonable then a judge won’t approve it anyway which is why we don’t forward proposed reaffirmation agreements for credit cards, unsecured lines of credit, etc.

If a reaffirmation agreement is contemplated by you for your automobile we will discuss that in the consultation when we talk about auto loans and the like. If it is advisable we will forward the proposed reaffirmation agreement to you upon receipt from the lender after we’ve had a chance to review it and add whatever information and signatures are required. We would then forward it on to you and you would sign it and sent it back to the creditor/lender. That lender would then file it with the bankruptcy court. Upon review the judge assigned to your case would review it and sign an order approving the agreement.

Sometimes lenders will send us proposed reaffirmation agreements regarding second/third mortgages for home equity lines of credit (HELOC) secured by real estate, either your home or investment property. For real estate you intend on keeping we suggest the “stay and pay” or “ride through” option that used to work just fine for automobiles before the law changes. That works because there was no special provision regarding reaffirmation agreements included in the new bankruptcy laws for mortgages as there was for auto loans. Therefore, just keep making the payments on time and that usually works the best. It is very rare when a first mortgage will even ask for a reaffirmation agreement anyway. We don’t ever certify for approval second or third mortgages as the potential for a deficiency there is quite real and would impose a great hardship on anyone.

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