Chapter 7 is designed to discharge (eliminate) your personal obligation to pay debts. Reaffirmation is the process by which you re-obligate yourself to pay debts securing property that you want to keep.
Reaffirmation is mostly used so that you can re-obligate yourself to pay the finance company for a car you want to keep and continue paying, or to re-obligate yourself to pay the mortgage for a house you want to keep.
Example Showing How Reaffirmation Works
Consider, for example, what happens if you file Chapter 7 and include a $20,000 debt to GMAC for a 2015 Chevrolet Tahoe. Your installment agreement with GMAC is called a secured debt because the Tahoe serves as collateral which protects GMAC’s interests.
If you want to give back the Tahoe back to GMAC, you can do so by surrendering the vehicle as part of your Chapter 7. The Chapter 7 discharge would wipe out any deficiency balance and you would never hear from GMAC about this debt ever again.
What if you want to keep the Tahoe? GMAC will want some reassurance that you are going to continue to pay so they will contact your lawyer to ask if you want to reaffirm this debt.
If you say “no,” and decline the offer to reaffirm, GMAC will file papers to gain the right to pick up your Tahoe, or they will wait until your Chapter 7 is over and then repossess it. Chapter 7 serves to cancel your installment contract, but GMAC will not let you keep the Tahoe unless you agree to legally re-obligate yourself and keep paying for it .
If you agree to reaffirm, GMAC’s lawyers will send your lawyer a reaffirmation agreement. This agreement will contain the same terms as your prior installment agreement and it will provide that you agree to make monthly payments on the remaining balance. Sometimes, by the way, we are able to negotiate a better deal for you when you reaffirm.
Once you sign the reaffirmation agreement you will again be contractually obligated to pay GMAC as if you had never filed bankruptcy at all. You can cancel the reaffirmation agreement if you do so in writing within 60 days.
- Reaffirmation can help you by serving to re-establish good credit. Reaffirmed debts will appear on your credit report, which means that your new credit history will get off to a good start.
- On the other hand, reaffirmation can be dangerous if your employment is not stable. Once the 60 day cancellation period has run, you own that reaffirmed debt and if you miss payments and go into default, you will be subject to collection efforts (repossession, foreclosure, wage garnishment, etc.) – bankruptcy will not protect you.
Bankruptcy judges will only approve a reaffirmation agreement if we can prove that you have the financial ability to make payments ongoing. A reaffirmation agreement often consists of more than 10 pages of disclosures and warnings so that you and your lawyer can carefully consider whether signing this agreement makes sense for you.
As your bankruptcy attorneys, Susan Blum or Jonathan Ginsberg will counsel and advise you about the pros and cons of qualifying for and signing a reaffirmation agreement given your budget and projected financial future. We do not want you to sign anything that could create problems so we are careful and thorough in our analysis.
If you think that personal bankruptcy might be in your future, please reach out to us – we’d be happy to answer your questions.
