Every Chapter 7 debtor must complete and file with the bankruptcy court a document known as the Statement of Intention. The purpose of the Statement of Intention is to notify the bankruptcy trustee and creditors whether the debtor intends to retain, surrender, redeem, or reaffirm property which is the security or collateral for certain debts.
Generally, a debtor must perform his stated intention within 30 days of the date first set for the meeting of creditors. If a debtor fails to perform his stated intention and the debt is a purchase money debt, the automatic stay dissolves with regard to the property securing the debt, giving the creditor the right to proceed with foreclosure or repossession without first obtaining a court order to do so.
What is a Reaffirmation Agreement?
Reaffirmation is a voluntary agreement between a debtor and a creditor whereby the debtor agrees to repay the debt according to the original terms or according to modified terms as set for in the reaffirmation agreement. A lender cannot force a debtor to reaffirm a debt. If the debtor's payments are current, he will be allowed to retain the property as long as he continues to make voluntary payments.
If a debtor reaffirms a debt, he will be allowed to retain possession of the property which is the collateral for the debt as long as he makes the payments as specified in the reaffirmation agreement. However, the reaffirmed debt will not be discharged.
Because reaffirmed debts are not discharged, creditors may pursue collection efforts against the debtor if at any point after discharge, he defaults on the debt.
When Should a Debtor Choose to Reaffirm a Debt?
The first thing you need to know about reaffirmation is that it is voluntary. Your secured creditors cannot force you to reaffirm a debt. However, if you are behind on your payments and you want to keep property that is collateral for a debt, you will probably have to reaffirm that debt. Most Chapter 7 debtors will reaffirm:
- Mortgages;
- Auto loans; and
- Loans for the purchase of furniture, electronics, computers, and computer accessories.
If your payments on a secured debt are current, most creditors will allow you to retain possession of the property as long as you continue to make voluntary payments on the debt.
Process
Generally, the reaffirmation process is initiated by the creditor who sends a reaffirmation agreement to you. However you can also initiate the reaffirmation process. The bankruptcy code provides a model reaffirmation agreement on Form 240A. The use of this model form is not a must but the form contains all the required terms.
In a reaffirmation agreement you agree to pay or a portion of an otherwise dischargeable debt. In return the creditor may agree not to repossess the collateral provided you make the payment as per the terms of the reaffirmation agreement. The secured creditor is however not required by law to agree to the reaffirmation agreement proposed by you.
Requirements
The reaffirmation agreement must be enforceable under all existing laws and must be filed in the bankruptcy court prior to the bankruptcy discharge. The reaffirmation agreement must specifically state that you have been informed that:
- the agreement is voluntary and not required by law – bankruptcy or non-bankruptcy and
- you can rescind the agreement by giving notice to the creditor at anytime before the discharge or within 60 days from date of filing of the reaffirmation agreement, whichever is later.
The reaffirmation agreement must provide details of your finances. If you are self filing, you must demonstrate that you will be able to make the payment according to the terms of the reaffirmation agreement. If you are filing through an attorney, your attorney must submit an affidavit to the court along with the reaffirmation agreement stating that you have been advised of the legal consequences of a default under the agreement and that the payment under the agreement will not cause any undue hardship to you. The bankruptcy court can reject your reaffirmation agreement if it is of the opinion that you cannot afford making the payment according to the terms of the agreement.
Default
If you default on making payment under the terms of the reaffirmation agreement, the creditor can collect the collateral from you and sell it to recover the dues. The creditor can also collect the deficiency from you if the collateral is sold for less than the debt due.
Issues With Reaffirming Debt
The debtor must sign a reaffirmation agreement form which sets forth specific information about the debt, including the repayment terms. If a debtor chooses to reaffirm a debt and after paying said debt, his net monthly income is negative, there is a presumption that reaffirmation will create an undue hardship for the debtor.
In such situations, a hearing will be held during which the debtor may rebut the presumption of undue hardship by demonstrating that he will have assistance paying the debt or that not being allowed to keep the property will impose an even greater hardship.
