Reaffirmation Agreements

Keeping your current vehicles following a Chapter 7 proceeding may involve what is called a “reaffirmation agreement.” It is a post-filing promise to remain personally bound on the secured debt, and it is an agreement that is additional to your bankruptcy statements and schedules—a reaffirmation agreement is one drafted by the creditor. In the event of a subsequent default, the agreement allows the creditor to sue you for any deficiency if it seizes and sells the collateral for less than what is owed. A reaffirmation agreement can be sought for any debt that is secured by a lien on tangible or real property. Though bankruptcy discharges most unsecured debts, most liens will remain in place. There are other options, about which I have previously written.

As your Austin bankruptcy attorney, I can help you with a reaffirmation agreement, under which you agree to repay an original loan on secured property like an automobile or a boat. Often a lender, acting in its own best interest, will give you some concessions on principal, interest rate, and the repayment schedule to accommodate your projected circumstances after discharge of your Chapter 7 bankruptcy. Unless you have considerable equity in that property, the lender will be anxious to obtain once again your personal guarantee.

You must, however, be able to demonstrate in a hearing with me before your bankruptcy judge that you can live up to the terms of any proposed reaffirmation agreement. And, often the judge will expect some concessions from the lender in order to look favorably on the agreement. It is important to realize that a reaffirmation agreement is only effective if approved by the judge. He or she must conclude that the agreement is in your best interest and that you are not likely to default under the revised terms and conditions of the loan.

However, there is an important exception. If you sign a reaffirmation agreement with a credit union, that agreement is binding with or without the consent of the judge.

In any case, you do have a short period of time to change your mind after signing a reaffirmation agreement, even if the judge has approved it. You have sixty days from the date you signed the agreement OR your discharge date to rescind the agreement. CAVEAT—often a hearing on the agreement occurs after your proposed discharge date, so your case can be discharged as soon as the judge enters his ruling—giving you virtually no time to rescind.

Note that if you are in arrears on a secured debt when you file for bankruptcy, a lender typically does not offer a reaffirmation agreement.

You should be aware of credit reporting issues when a debt is discharged under a Chapter 7 bankruptcy. Failure to execute a reaffirmation agreement is tantamount to discharging that secured debt as to you, personally. The lender’s only recourse thereafter is against the collateral. Normally the lender will stop reporting payments to the credit bureaus and will show your balance as zero. If the debt is reaffirmed, you will have a longer continuous history, and the length of time credit has been established is an important part of rebuilding your credit score.

As with all Chapter 7 bankruptcy matters, I will advise you on whether or how to pursue a reaffirmation agreement based on a detailed analysis of your particular circumstances. There are cases where this is the best method to retain assets like that old reliable car that is your work transportation, but sometimes there are better alternatives. It’s a matter of doing the calculations carefully and of knowing generally what is acceptable to judges in this jurisdiction.