What is a Reaffirmation Agreement?

In almost every chapter 7 bankruptcy case the Debtor(s) will have vehicle(s) or some other type of personal property that they owe money on and want to keep. There is a statement, called the Statement of Intentions, that deals with this situation and it is usually filed with your other bankruptcy documents. The Statement of Intention tells the Court and the creditor what the Debtor intends to do with that particular piece of personal property.

The Bankruptcy Code allows three choices when it comes to personal property where money is owed. You may surrender the property, redeem the property, or retain the property and reaffirm the debt. Surrender means you give the property, and its liability, back to the lender. To redeem, you pay the lender a lump sum equal to the FMV of the asset. To retain the personal property, the Code requires you to reaffirm the debt.

Reaffirming a debt is a drastic measure. Essentially by reaffirming a debt you are taking that debt outside of the protection of your bankruptcy filing and making you liable for the debt as if you never filed for bankruptcy protection. In other words, if you reaffirm and then default you can be sued and you will owe the money. As you can see the whole concept of reaffirmation runs counter to the underlying purpose of filing a bankruptcy case, that being the discharge of debt.

When presented with a reaffirmation scenario the conversation usually goes like this: I want to keep my car (we Americans do love our vehicles even if we owe way more than the vehicle is worth) or I need my car to get to work, school, you fill in the blanks and if I have to reaffirm to keep it I will reaffirm the debt. Aside from the purely financial and practical response being that you may need a vehicle but you don’t need this vehicle, my response in almost every case is that reaffirmation is not in your best interest and I will not certify the Reaffirmation Agreement. By not certifying the Reaffirmation Agreement your attorney is telling the Court that he/she does not believe the reaffirmation is in her Client’s best interest.

Even after discussing the pitfalls surrounding reaffirmation with their bankruptcy attorney a surprising number of clients will still decide to proceed with the reaffirmation. The agreement is signed by the client and mailed to the lender who signs off and files it with the Court. The Court sets a hearing and ultimately decides whether to approve or deny the reaffirmation. Luckily the Judges in this jurisdiction are loath to approve a reaffirmation unless the terms of the Reaffirmation Agreement or the circumstances surrounding the reaffirmation are clearly in the Debtor’s best interest, a very high hurdle indeed. The Court may fashion an order denying the reaffirmation while still allowing the Debtor to retain the property, but this is something you must discuss with your bankruptcy attorney before your hearing.

Is there ever an instance where reaffirmation is in the client’s best interest? Maybe. There is always the possibility that the lender will significantly reduce the principal and/or interest rate. It is possible that the Debtor has no other option. It’s possible the Cubs might win the Pennant, but I am not holding my breath.

There are very few scenarios where reaffirming debt is in the Debtors best interest. Yes it can happen however in the overwhelming number of cases reaffirming debt is not a prudent course of action for someone who has just filed for bankruptcy protection. Think with your head as you did when you decided to file your bankruptcy case and I am confident you will come to the very same conclusion.