Reaffirming Debt in Bankruptcy

By Donald A. Hayes, Attorney at Law


 

 

Your discharge in bankruptcy relieves you of the legal liability to pay debts that are discharged. You may decide that you voluntarily want to pay a debt that has been discharged and there is no prohibition against your doing this. However, you are not required to reaffirm any debt or sign any agreement regarding a debt that has been or will be discharged in your bankruptcy. If the debt is reaffirmed it must be signed by the debtor and his attorney, and approved by the court. Even though the discharge means you do not have to pay the debts that are discharged, in some cases a creditor will have a security interest in some property. This means that the creditor will be able to take it if you do not pay the debt. When a consumer debt is secured by collateral, i.e., a car, boat, furniture, appliances, computer etc., the debtor has a choice on what they will do. They will file a statement of intentions in their bankruptcy case stating that they will do one of the following: (1) they will surrender the property which secures the debt, (2) they wish to continue making payments on the debt and keep the property which secures the debt, but do not want to reaffirm the debt, (3) they wish to continue making payments on the debt and keep the property which secures the debt, and they will reaffirm the debt, (4) they will redeem the debt for a lump sum payment.

If someone owns a car which they are not particularly happy with because it doesn=t run well, needs repairs, etc. they can choose to surrender the property back to the creditor and they will owe nothing. If you purchased a car and you do want to keep it you would continue making payments on the car but would not reaffirm the debt. If you reaffirm the debt on the car then you will be personally responsible for any deficiency on the loan should you subsequently default and the lender repossesses the car. Since the lender will not offer you any reduction in the principal balance, there is no incentive for you to reaffirm. However, if you purchased a computer and you want to keep it you would offer to continue making monthly payments and you would offer to reaffirm the debt. The reason you would do this is because the creditor on the computer will most likely offer you something in return. They will offer to reduce the principal amount owed on the computer if you will agree to reaffirm. This gives you an incentive to sign a reaffirmation agreement since you will agree to continue making regular monthly payments on a reduced principal amount.

Depending on the property which acts as the security, this can mean a reduction of 50% or better depending on the age and condition of the property. Your lawyer should be able to negotiate favorable terms for you on just about every type of property with the exception of an automobile. Lenders on automobiles are not inclined to reduce their loan balances if you reaffirm. The reason is probably because the loan amount is usually structured to be paid down faster than the cars value declines. Also, there is a more certain market for used cars than there is for used computers.

Finally you may choose to retain and redeem the property by making a lump sum payment on the reduced principal balance which is favorable to you.

Your lawyer may save you more money in negotiating reaffirmation agreements than he will charge you to handle your Chapter 7 case!!