The Bankruptcy Code requires the debtor to, among other things, state her intention with respect to debts secured by property of the estate. (See my earlier posts discussing “property of the estate”.) This means that the debtor has to disclose what she wants to do with the property securing the debt – i.e. redeem, reaffirm or surrender the property. This article explains what a reaffirmation agreement is and what it means to reaffirm debts in bankruptcy.
A reaffirmation agreement is an agreement between the debtor and her creditor(s) wherein the debtor agrees to remain personally liable for an otherwise dischargeable debt. The debtor’s agreement to be obligated for the debt as if the bankruptcy had never been filed is “consideration” for the reaffirmation agreement. Reaffirmation agreements are disfavored because they stand in direct conflict with the policy and purpose of bankruptcy, namely, to provide the debtor a financial fresh start. Sometimes, though, reaffirmation agreements are required in order for the debtor to retain possession of certain property.
The classic example is the debtor’s vehicle. It used to be that the debtor could retain possession of her vehicle in Chapter 7 through the so-called “ride through” or “retain and pay” option, meaning, as long as the debtor remained current on the payments she could retain possession of the vehicle. This option was abolished in 2005 through substantial changes that were made by Congress to the Bankruptcy Code under the Bankruptcy Abuse Prevention & Consumer Protection Act (BAPCPA). Current law requires the debtor to reaffirm (or redeem) the debt, or at least attempt to do so if the debtor wishes to retain possession and ensure that the vehicle will not be repossessed.
In order to reaffirm a debt, the debtor must state her intention to reaffirm by filing with the court a Statement of Intention within 30 days of the date the case is filed. In addition, the debtor must perform her intention within 45 days of the date of the meeting of creditors by entering into a written reaffirmation agreement with the creditor and filing the reaffirmation agreement with the court. If the debtor is not represented by an attorney, court approval of the reaffirmation agreement is required. If the debtor is represented the attorney must verify that the reaffirmation agreement is fair and in the debtor’s best interest, and will not cause an undue burden on the debtor or the debtor’s dependents.
If the debtor fails to file a Statement of Intention, or perform with respect to the Statement of Intention, the automatic stay is lifted as to the personal property securing the debt and the lender may pursue its state-law rights against the property. In the above-example, by repossessing the vehicle. As a practical matter, some lenders do not require reaffirmation because they would rather receive the monthly payments than have another used car sitting on their lot. However, ever lender is different, and many do require reaffirmation of the debt.
If you would like more information about reaffirmation agreements, contact us today for a free, no-obligation consultation.