Reaffirmation Agreements in Chapter 7

A reaffirmation agreement is a contract signed during a Chapter 7 bankruptcy in which the debtor agrees to remain personally liable on a debt that would otherwise be discharged. Section 524(c) of the Bankruptcy Code authorizes reaffirmation. The most common contexts are vehicle loans and, less commonly, mortgages on a home the debtor wants to keep.

Reaffirmation is voluntary. The court is not allowed to require it. But many secured lenders – particularly captive auto finance companies – will press hard for a reaffirmation and may threaten to repossess the collateral if the debtor refuses.

What Reaffirmation Does

• Eliminates the discharge as to the reaffirmed debt – the debtor remains personally liable after bankruptcy
• Keeps the original loan and security agreement in effect
• Allows the lender to report the loan to credit bureaus going forward as a current account in good standing (assuming the debtor pays on time)
• Generally satisfies any "ipso facto" default clause that would otherwise let the lender accelerate the loan because of the bankruptcy filing

The Downside of Reaffirmation

• If the debtor later cannot pay the loan, the lender can sue for any deficiency – the protection of the discharge is gone for that debt
• The reaffirmation locks the debtor into the loan terms, which may be unfavorable
• For vehicles whose loan exceeds the value, reaffirmation commits the debtor to overpay

The Court-Approval Requirement

For a reaffirmation to be enforceable, it must be signed before the discharge is entered, filed with the court, and either certified by an attorney as not creating undue hardship or approved by the court at a hearing. Pro se debtors must attend a reaffirmation hearing. Represented debtors typically avoid the hearing if the attorney signs the certification.

Most courts in the Southern District of Florida scrutinize reaffirmation agreements carefully. If the agreement requires payments the debtor cannot demonstrably afford from the budget on Schedules I and J, the court is unlikely to approve it.

Vehicle Loans: The Most Common Reaffirmation

For a Chapter 7 debtor who wants to keep a financed car, the options are:

1. Reaffirm the existing loan and remain personally liable
2. Redeem the car by paying the lender the current fair market value in a lump sum
3. Surrender the car and walk away with no further obligation
4. Ride-through – keep the car, keep paying, but do not reaffirm. The lien remains; personal liability does not. Some lenders accept this, others do not.

For loans with substantial negative equity (you owe much more than the car is worth), reaffirmation rarely makes sense unless the car is essential and the debtor has no realistic alternative. Sometimes the better answer is to surrender, discharge the debt, and purchase a replacement vehicle with a new loan after discharge.

Mortgages: Usually Do Not Reaffirm

Most bankruptcy attorneys in Florida recommend against reaffirming a residential mortgage in Chapter 7. The reasons:

• The Florida homestead exemption already protects the property
• The lender can still foreclose on the lien if the debtor stops paying, but without recourse against the debtor personally for any deficiency
• Reaffirmation re-creates personal liability for what is often the largest debt in the household
• Most Florida mortgage lenders accept "ride-through" arrangements on Chapter 7 mortgages

The flip side: some lenders will refuse to report current payments to credit bureaus on a non-reaffirmed mortgage, which can affect post-bankruptcy credit rebuilding. We discuss the tradeoffs with each client.

Redemption as an Alternative

Section 722 of the Bankruptcy Code allows a Chapter 7 debtor to redeem tangible personal property by paying the lender the current fair market value in a single lump-sum payment. Redemption is most common for vehicles where the loan balance significantly exceeds the value. Specialty lenders will sometimes finance redemption payments.

Schedule a Consultation

Reaffirmation decisions are case-specific. The right answer depends on the equity in the collateral, the interest rate on the loan, the debtor's income, and the importance of the collateral to the household. Call 786-522-1411 or email [email protected] to discuss your specific situation.