You filed for Chapter 7 bankruptcy and had a balance due to the lender.  Faced with what seemed to be certain repossession, you agreed to sign a reaffirmation agreement.  All set, right?  Not necessarily.

There’s a moment in time when you reach a point of desperation.  You need that car to get to work each morning, pick up the kids from school, and a million other reasons.  It doesn’t matter that the car payments are bleeding you dry, the darn thing breaks down on a regular basis, or you just plain don’t like it.

You need a car, and you know chances are slim to none that you’re going to be able to qualify for new financing immediately after bankruptcy.

So you tell your lawyer to call up the car lender to get a reaffirmation agreement.  Your lawyer probably cautions you against committing yourself to new debt on the heels of bankruptcy.  Ultimately, you make the decision.  You sign on the dotted line.

What’s The Procedure?

You’ve got to sign an agreement that contains a number of disclosures.  Once that’s done, your lawyer’s got to sign the agreement as well.  That’s where it gets a bit thorny, because your lawyer’s signature means that he or she doesn’t think you’ll have a problem making the payments under the agreement.

Lots of bankruptcy lawyers don’t sign reaffirmation agreements for exactly this reason – after all, if you get in debt trouble after bankruptcy then your lawyer’s going to look pretty bad in front of the court.

If your bankruptcy lawyer doesn’t sign the agreement then it’s up to the judge to allow the agreement to stand or not.  If the attorney does sign, no court hearing is needed.

Filed And Honored

Under the bankruptcy laws, a reaffirmation agreement must be filed with the court in order to be valid.  If it’s not filed then the agreement isn’t binding.

Once the agreement is filed, you get 60 days (or the date of your bankruptcy discharge, whichever is sooner) to rescind it – in other words, you can still change your mind.  All you need to do is write a letter to the creditor and file it with the court.  Nothing fancy necessary to back out of the deal.

Effect Of Discharge

If your reaffirmation agreement is unfiled or rescinded in a timely manner then you’re no longer held personally liable for the debt.  You’re still going to make the loan payments (assuming the lender doesn’t repossess the car due to the bankruptcy filing, but that’s another article for another day) but if it’s repossessed then you’re off the hook financially.

Statements In The Mail After Bankruptcy

Your lender can’t legally send you statements each month after your bankruptcy discharge unless the reaffirmation agreement was in effect as of the date of discharge.  Any demands for payment are considered violations of the discharge injunction, and may subject the lender to legal action if you decide to sue.  For that reason, it’s a good idea to think about setting up an automatic payment system through your bank to ensure that payments are sent on time each month.

Your Credit Report After Bankruptcy

Once a debt is discharged in bankruptcy, the lender must update the consumer’s credit report to indicate a zero balance and the fact that the debt was discharged in bankruptcy.  No other information may be provided on a going-forward basis.  Though this protects you in the case of discharged credit card debts and the like, you need to realize that it applies to car loans without reaffirmation agreements in place.

Those car payments you’ve been making after your bankruptcy discharge aren’t going to help your credit score.  The lender may provide information on your payment history to a new prospective lender at your request, but nobody’s going to know about them solely by looking at your credit report.

If you’re habitually late on payments, that’s not so bad.  But if you’re making payments purely as a way to re-build credit after bankruptcy, it’s not going to help unless you’ve got a filed and binding reaffirmation agreement in place.

In the end, the decision is yours whether to reaffirm a debt or not.  Make the choice carefully, and know the implications for your life after your bankruptcy discharge is issued.

Image credit:  katherinetompkins

Jay S. Fleischman is a consumer bankruptcy lawyer who sues creditors and bill collectors for harassment after bankruptcy. When not helping people with bill problems, he works with attorneys to help improve their law firm marketing efforts.

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Much has been written already about reaffirmation agreements and this blog will not cover any new ground, but will provide a quick explanation for potential bankruptcy clients.

A reaffirmation agreement is a contract entered into during the pendency of  (usually) a Chapter 7 bankruptcy case which stops the particular debt from being discharged.  In other words, it creates an obligation to repay that debt after the bankruptcy case is completed.

Is reaffirming a debt a ever a good idea?  This is a tough question to answer.

Typically, only secured debts are reaffirmed in order to allow the debtor to retain the collateral.  Under the amendments to the Bankruptcy Code which took effect in 2005 (BAPCPA), secured creditors can treat the filing of the bankruptcy as a default and use that as a basis to repossess their collateral (such as an automobile) after the bankruptcy case is over, if applicable state law allows it.  As a result, the only sure way to keep a secured motor vehicle or other personal property is to enter into a reaffirmation agreement.

However, there is a big downside to reaffirmation agreements, namely that if you fail to make the required payments, not only can the creditor repossess its collateral, but the debtor will also owe whatever is left on the balance of the reaffirmed debt.  It is for this reason, among many others, that most attorneys advise against doing reaffirmation agreements.

There are a few saving graces, however.  First, as far as vehicles go, the majority of vehicle creditors will allow debtors to just stay current and maintain their payments without entering into a reaffirmation agreement.  Second, there is at lease an argument to be made for merely attempting a reaffirmation agreement and if the judge denies it, then the debtor should be able to retain the collateral and make payments because they have done all that is required of them by the bankruptcy code.

There may be reasons to reaffirm smaller debts, such as with credit unions in order to retain future credit privileges with them, but as always you need to get advice on your specific situation from your bankruptcy attorney.

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Whether you can discharge (bankrupt) specific debts and keep others is a question that over the years I get asked repeatedly. Actually, strangely enough, clients don’t ask it as a question. They state it as if it were completely possible. “I want to get rid of my large debts and keep the small ones”. After nearly twenty years of listening to this, I believe a lot of it stems from some very basic confusion of bankruptcy discharges and the general requirements and obligations of being a debtor in bankruptcy.

First: There are numerous requirements to filing a bankruptcy case. One of them is that you must LIST ALL of your debts and ALL of your assets in your bankruptcy schedules.

Second: When you receive a discharge, you are discharged from any and all debts that are made dischargeable by the Bankruptcy Code (unless a creditor or other party successfully objects to the discharge).

Third: You can voluntarily repay any debt you want after the bankruptcy case is completed (in a Chapter 7 case, this is about 4 months after the case is filed, in Chapter 13, it’s 36-60+ months). See more on how the process works for each bankruptcy chapter.

Fourth: In a Chapter 7 case, you may, with the consent of the creditor and approval by the bankruptcy court, enter into a reaffirmation agreement. What this does is take the debt out of the bankruptcy and obligate you to the terms of the agreement (whatever they may be) despite the discharge you ultimately receive in the bankruptcy case. Reaffirmation agreements must be signed, executed, and filed with the court prior to the entry of discharge in your case.

The critical question to ask when trying to determine (or ask your attorney) whether you can discharge certain debts is: WHY do you want to do that (whatever “that” is)? In my experience, most debtors perceive that if they keep certain creditors off the bankruptcy, that they will magically be able to continue to have credit with them. Nothing could be further from the truth. In fact, with respect to credit card debt in particular, you have a much better chance of negotiating for a reaffirmation agreement with them (if that is your goal) to keep some credit on the card after your discharge is granted. Personally, I advise my clients strongly against doing that (because getting a new credit card after bankruptcy is about as difficult as finding mud after a rainstorm).

There is much more to say on this topic, such as how secured debts are handled in bankruptcy. If you have questions, you should schedule a consult with a bankruptcy attorney.

Image Courtesy of Caitlyn_and_Kara

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