Bankruptcy and Secured Property:
Why Reaffirm ad Debt?
January 15, 2007
Secured property is anything purchased on which a balance is owed to the creditor, like a car, some furniture, a computer, boat or a house. It is sometimes called a security, because it protects or shelters the debt for the creditor. If you default on the amount due on your secured property, the creditor can not only repossess the property, but then hold you responsible for the balance due on the purchase.
When you file for bankruptcy, secured property can be a major headache. In Chapter 7 liquidation bankruptcies, payments must be current or you will likely lose the collateral. In Chapter 13 bankruptcies, you can keep the collateral as long as you pay the amount due each month after the filing date of your case. The amount you were behind is repaid through the Chapter 13 Plan. In the Chapter 7 context, creditors will discuss reaffirmation agreements.
Under the new 2005 bankruptcy law (The Bankruptcy Reform and Abuse Prevention Act of 2005), creditors holding secured collateral can require you, as an individual or a couple filing together, to sign what is known as a Reaffirmation Agreement if you wish to retain secured collateral. A Reaffirmation Agreement takes your debt outside the scope of a bankruptcy. It effectively nullifies the discharge as to the particular debt reaffirmed.
“Reaffs,” as they’re known, could not be required under the old bankruptcy law. If you fell behind on your payments six months or even a year after your bankruptcy case was discharged, you could then surrender the property without fear of a collectable deficiency balance. Creditors would always ask you to sign a reaff, because they had nothing to lose. Unfortunately, individuals not represented by attorneys often signed the reaff, because they didn’t understand the implications.
Whether or not you should sign a reaffirmation agreement depends on several factors. The first and most important is whether you will be able to continue making the payments. Simply wanting to be able to keep the property is not enough. Once your debt is reaffirmed, surrendering the property because you can’t afford it is a bad option. The creditor will take back the property and sell it, often for far less than the reaffirmed balance. The difference between what the property was sold for and the amount reaffirmed is the deficiency, and because the debt was reaffirmed, that deficiency is collectable. It has effectively been taken outside the scope of your bankruptcy protections.
The second factor to consider is what your income is likely to do over the remaining term of the reaffirmed agreement. If the term is relatively short and the payment is reasonable, it might be worth your while to sign the agreement. The key is to determine if your debt is likely to be a burden. If it is, then don’t reaffirm.
What if you have no choice? In some cases, the only way to keep a car is to sign the reaff. You may worry that if you don’t sign the agreement, your car will be repossessed. Technically, the new law gives secured creditors this right, but in practice, the last thing they want is the collateral. The creditor is in the business of collecting payments, not reselling used cars or other property. Bottom line: if you are current on your payments, a car dealer or other creditor is not going to force you to sign a reaffirmation agreement. They will ask for them, but attorneys are typically still advising clients not to sign them. After all, the agreement requires that the attorney warrant to the Court that the debtor (you) has the present and future ability to repay the debt.
The last I checked, law schools weren’t issuing crystal balls, so if a creditor pushes the issue, fine. Let them take back their collateral. Allow the debt to be discharged. I help my clients get back to good credit scores within a year of filing bankruptcy. They can always buy new secured property, like cars and electronics, once their FICO scores are back in the “A” category.
