Consumers who are considering Chapter 7 bankruptcy should be informed about reaffirmations. What are they and what are the consequences? People should try to be aware of reaffirmations early in the process to understand their options.
Firstly, a Chapter 7 Discharge kills the consumer’s personal obligation to pay on secured debt. If he or she becomes delinquent again in a month or a year after the bankruptcy closes, the lender can take the car or house back, but can’t file suit against the consumer. Unless the consumer signed a reaffirmation agreement during the bankruptcy, in which case the lender can file suit.
So why on earth would a consumer sign something like that? Well, some lenders (such as Ford Motor Credit) insist upon it. If a consumer refuses to sign the reaff, the lender can repossess the vehicle even if the consumer has not missed any payments. However, most lenders allow the debtor to retain the collateral so long as they continue making payments.
But some lenders use credit reports to pressure the consumer to reaffirm. If the debt is not reaffirmed, the lender will not report the subsequent timely payments to the credit bureau, instead leaving a blank. This makes it more difficult for the consumer to rebuild credit after the bankruptcy is completed.
The lender will draft a reaffirmation agreement and send it to the debtor’s counsel to review. The debtor and counsel will sign it and return it to the lender, who then files it with the court. The judge wants to make sure that it is not an undue burden on the debtor, and will look at Schedules I and J to ensure that the debtor can afford to make the payments.
What if the debtor signs and the lender submits a reaffirmation agreement but Schedules I and J indicate that it’s an undue burden? In In re Chim (381 B.R. 191, Bankr. MD 2008), Judge Catliota ruled that the reaffirmation was not binding on the debtor, but that the lender could not repossess the vehicle so long as the debtor continued making payments on it.
A reaffirmation is a big decision to make and consumers should consult with their attorneys to discuss their options. They may want to surrender it, retain and pay if possible, or file a motion to redeem the property under section 722 if they qualify.