What is a reaffirmation? Do I need one?
A creditor may contact your bankruptcy attorney about signing a reaffirmation agreement. This can happen with any secured debt, but is usually seen in the context of vehicle loans. The reason for the creditor’s request is this. In a Chapter 7 bankruptcy the debtor’s personal obligation to repay his or her debts is extinguished in the discharge. This isn’t good for the secured lender because if the debtor fails to make future car payments the bankruptcy discharge prevents the creditor from going after the debtor. Without the reaffirmation agreement the lender could still repossess the automobile, but frequently the wholesale value of the vehicle is worth less than the outstanding amount of the loan. The creditor’s solution is a reaffirmation agreement.
A reaffirmation agreement reverses the protection of the bankruptcy discharge because the debtor re-obligates him or herself to repay the loan despite the bankruptcy. This can’t be in favor of debtors, why would any of my clients agree to do this? Simply this. The law allows the secured lenders to present the debtors a stark choice. Either sign the reaffirmation agreement and keep making payments on time or else surrender the vehicle.
Your attorney has a special role in these agreements. He is asked to certify that the debtor can afford to make the payments or the reaffirmation agreement must be set for a court hearing. In our district in New Orleans, the court is very reluctant to approve a reaffirmation without a showing that it is affordable.
The alternative to a reaffirmation is to surrender the vehicle which must be done within 45 days of the Meeting of Creditors. The good part about surrender is that the debtors will have no further obligations to that creditor. Yet, many debtors are fond of their cars, want to keep and can afford them so they elect to sign the reaffirmation agreement.