Reaffirmations After Bankruptcy Discharge
Normally, debtors going through Chapter 7 are discharged of their personal liability for secured loans. In other words, the debtor can keep the car or house and keep making payments on it, and if the debtor defaults in the future, the lender can repossess the car or foreclose on the house, but cannot sue the debtor for money. If the debtor signs a reaffirmation agreement during the bankruptcy, however, then the lender can sue him if he defaults in the future. Why would a debtor sign something like that? Debtors sign these in order to improve their credit scores, because some lenders don’t report post-bankruptcy payments to the credit reporting agencies unless the debtor has reaffirmed the debt.
Reaffirmation agreements must be signed before the debtor gets his discharge in the bankruptcy. That normally takes place about 60 days after the meeting of creditors. But what if the debtor does not sign the reaffirmation agreement during that period, and then later realizes that he or she wants to do so in order to improve his credit score? The debtor must then file a motion to reopen the bankruptcy case, then file a second motion to vacate the discharge, then file the reaffirmation agreement with the court.
Most courts will not allow debtors to do this. It’s their opinion that the law simply doesn’t allow them to vacate a discharge order once it has been entered for this reason. As Judge Teel said in In re Williams (Case 11-00761, DC, March 12, 2012):
[A] discharge is a point of cleavage in a bankruptcy case that has consequences beyond the issue of reaffirmation agreements, and this counsels against allowing debtors to obtain an order vacating the discharge when the clerk has not erred in issuing the discharge.
Courts in DC, Ohio, Montana, Texas, Connecticut, Indiana, New York, Oklahoma, and New Jersey have declined to vacate discharges for this reason, making it impossible to reaffirm a debt after the debtor receives a discharge.
However, a minority line of courts has allowed the debtor to vacate the discharge and file a reaffirmation agreement. Courts in New Hampshire, New York, Maine, and Pennsylvania have said that the bankruptcy court’s equitable powers and/or Fed. R. Civ. P. 60(b)(6) allows them to do so in certain cases.
Maryland has no published opinions on this issue, although at least one Maryland court vacated a debtor’s discharge in order to allow them to execute reaffirmations. A Maryland bankruptcy judge will eventually issue a written opinion, either allowing or disallowing the practice.
Reaffirming a debt is a big decision and Chapter 7 debtors shouldn’t do it unless there’s a very good reason. But if a debtor really wants to reaffirm a debt, he or she should do it before the discharge is granted. Doing so afterward will be either impossible or expensive.