Reaffirmations in Chapter 7 Bankruptcy
Some debtors are confused about reaffirmation of a debt during their bankruptcy
What constitutes a reaffirmation?Reaffirmation means you sign a new promise to pay the creditor which promise replaces the one excused by the bankruptcy discharge. Most of the time, only secured debts are the subject of a reaffirmation procedure. Reaffirmation agreements are proposed and presented by the affected creditor and sent to the debtor or their attorney during the pendency of the case. After debts are discharged, it is too late to reaffirm any debt. That said, the security interest survives the discharge. What that means is that if a debtor wants to retain the collateral for the discharged debt, you have to keep making the payments. As long as the debtor maintains insurance on the collateral, pays the taxes, if any, and keeps the payments current, the creditor cannot repossess the collateral. (Credit unions have a different practice, however).
The reaffirmation process and aftermathThe reaffirmation process is initiated by the affected creditor who will begin by contacting the debtor's lawyer to see if a reaffirmation is possible. The creditor likely knows what is in a debtor's Statement of Intention document. There, the debtor decides whether or not a particular item of collateral is to be surrendered, reaffirmed, redeemed, or "other".
Most secured creditors make it difficult on non-reaffirming debtors by stopping updates to credit reports reflecting the timely continuation of your monthly payments. The creditor believes (incorrectly in my opinion) that updating your credit report to reflect payment activity could be considered attempts to collect a discharged debt. Doing this might be considered a violation of the automatic stay exposing the creditor to sanctions (fines) for such activity. That is why your credit report says zero balance on the secured loan. This does not mean you get to keep the collateral (a vehicle or real estate, for example) without making the monthly payments.
If you reaffirm a debt, and then discovered you were unable to continue making payments, the collateral would be repossessed, sold, and a demand made on you to pay the shortfall when the sale of the collateral is insufficient to pay the payoff balance of the loan. Without a reaffirmation, future problems making the payment result in repossession of the collateral, its sale, but no demand on you to pay any shortfall.