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Reaffirming Debts in Chapter 7

Although most people file Chapter 7 to wipe out unsecured debts like credit card bills, medical debt, repossession deficiencies and signature loans, it is possible to keep “big ticket” items such as a house, car, furniture, jewelry or other secured property.  In practice debtors have at least three, and probably four, choices in dealing with secured debt and secured collateral:

1. Reaffirmation - the subject of this page
    
2. Redemption - discussed elsewhere on this web site
    
3. Surrender - give up the collateral, eliminate the debt and move on
    
4. Keep and Pay - keep making payments, keep the collateral, do not enter into a formal written reaffirmation agreement with the creditor.  This option was supposedly eliminated by the 2005 changes to the bankruptcy laws, but, in fact, it has not gone away.  Click on the link to learn more about this tactic.

Reaffirming Secured Debts in Chapter 7

When you reaffirm a secured debt in Chapter 7, you agree in writing to bind yourself to the terms of your installment contact with the secured creditor, and you agree that your Chapter 7 discharge will not apply to that creditor.  Once the reaffirmation becomes “permanent” - you have 60 days to change your mind (but do so in writing) - you are bound to the terms of your contract.  If you do not pay the debt, your property can be repossessed or foreclosed and you can be sued for the deficiency balance.

Usually, when you reaffirm a debt you do so with the same terms as the original contract, but if the collateral securing the loan has gone down in value, you and your lawyer should not hesitate to open negotiations with your creditor to modify the terms in your favor.   Some items of personal property like mattresses, living room furniture have little or no market value on the open market so you should offer pennies on the dollar to reaffirm.

Other secured items like cars, trucks, boats and motorcycles can easily be sold at auction so those lenders will be less likely to negotiate but it never hurts to try.

Traditionally mortgage lenders have not been amenable to negotiation of lower balances or more favorable terms, but the recent downturn in the real estate market means that real estate loans can be rewritten as well.

Conditions to Reaffirm a Secured Debt

If you want to reaffirm a secured debt, the following conditions must be met:

1. you must have little or no equity in the property - ideally your equity in the collateral that secures the loan should be fully exempt.  If the property value exceeds your available exemption you will need to include your Chapter 7 trustee in the reaffirmation negotiations
    
2. you must be current or substantially current with your payments - reaffirmation is voluntary on the part of the creditor and if you are not current, your secured creditor will not reaffirm
    
3. the reaffirmation must be in your “best interest” - this means that your budget must show enough disposable income such that you can afford to reaffirm the debt.  For example, if you want to reaffirm a $350 per month car note, but you only have $100 left over in your budget after paying other monthly obligations, the $350 reaffirmation is not viable. 

I will not sign off on a reaffirmation agreement if my client does not have enough money in his budget to cover the monthly expense.  Reaffirmation documents now required by the judges in the Northern District of Georgia include a required statement from debtor’s counsel that the attorney has reviewed the reaffirmation and that it is in the debtor’s best interest, although at least one judge in the Northern District of Georgia will review a reaffirmation agreement at a debtor’s request even if that debtor is represented and the debtor’s lawyer refuses to sign the “best interest of the debtor” certification.

“Keep and Pay” vs. Reaffirmation

The United States bankruptcy law suggests that you no longer have the option to neither reaffirm or surrender - in other words, don’t sign any type of reaffirmation agreement but continue to pay the debt. Lawyer refer to this strategy as “keep and pay” and there are some signs that it remains a viable option despite what the Code says.  Click on the link to learn more about the “keep and pay” strategy and whether you should consider this option.

Reaffirmation of Unsecured Debts in Chapter 7

You can also reaffirm unsecured debts in Chapter 7.  I see this when my clients have co-signed debts with a non-filing parent or adult child, or with an employer or business. 

Sometimes a client will ask me to request a reaffirmation agreement from a credit card issuer because my client wants to maintain his account or use the credit card account to rebuild his credit.  Over the years I have come to recommend reaffirmation of a credit card debt less and less.  I do not have much faith that a credit card issuer will keep a reaffirmed account open, nor do I think this type of reaffirmation will really help much in re-establishing credit.

The bottom line - reaffirmation of debts in Chapter 7 is serious business.  When you reaffirm a debt you are pulling that debt out of bankruptcy protection permanently.  The point of a Chapter 7 is to eliminate your debt and start you fresh on the road to financial recovery.  “Keep and pay” should be part of your discussion with your lawyer as it offers many of the advantages of reaffirmation without the associated liability.  Make the decision to reaffirm a debt only if you are sure that doing so is absolutely necessary.

This website copyright 2010 by Ginsberg Law Offices, P.C.  All rights reserved. No reproduction of the original content on this site without express permission of the site owner.  Please direct inquiries to Jonathan Ginsberg, Ginsberg Law Offices, 1854 Independence Square, Atlanta, GA 30338.