Reaffirming Debts in Chapter 7: A Primer
Many of you considering bankruptcy may be wondering: what if I do not want to discharge ALL of my debts in Chapter 7? Is there a way to tell the bankruptcy court that I want to keep some of these debts for whatever reason? The short answer: yes. The Chapter 7 petition process allows for a debtor to choose debts s/he wishes to continue personal responsibility for. The first thing the debtor must due is indicate on the Statement of Intention (to be filed and served within 30 days of filing your petition or before the meeting of the creditors, which ever is first) which debts s/he wants to continue personal liability for. The Statement of Intention, however, only allows for a debtor to indicate secured debts (mortgages, vehicle loans, etc.) or leases for personal property (vehicles, computers, furniture, etc.). What is missing here? Leases for real property and executory contracts (cell phone or utility contracts, etc.); you already indicate those on Schedule G of your petition so mention you intend to assume responsibility for them there, as well. (The Statement of Intention should provide a clue: the debtor should not continue personal liability for types of debt not covered by the Statement of Intention, such as unsecured credit card debt or medical bills.) Great, you have told the court that you intend to continue your personal responsibility for some debts. Is that it? No. Even if you indicated an intention to continue personal responsibility, you still should attempt to enter into reaffirmation agreements with some of these creditors, especially for secured debts to ensure your property is 100% safe from collection. Entering into a reaffirmation process is a two-step process. First, you must negotiate a new agreement with the creditor and the creditor may not wish to enter into a reaffirmation agreement (for whatever reason). Second, you must get court approval for the reaffirmation agreement before it is in effect; if the court does not believe you can continue to cover your regular expenses with the reaffirmed debt, the court will reject the agreement. Under the 2005 bankruptcy reforms, a debtor's bankruptcy attorney is also required to "guarantee" a debtor's ability to pay the debt in a reaffirmation agreement; for long-term or high-value agreements, the attorney most probably will not be willing to do so (an attorney's liability for a debtor's failure to pay according to the terms of a reaffirmation agreement years down the road is still unknown). However, even if you do not enter into a reaffirmation agreement for a secured debt, this does not mean you automatically lose the property. It just means the court will do what it was going to do anyways: discharge your personal responsibility to the debt. You can still choose to continue paying the debt as per the terms of the pre-bankruptcy loan agreement; odds are, the creditor will not begin collection proceedings as long as it is getting money. Finally, intending to reaffirm a secured debt does NOT mean the underlying property will be safe from a bankruptcy trustee seizure and liquidation. If there is a lot of equity in the property and you cannot exempt the property, there is a risk you will lose the property.