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Reaffirmation Agreements in Chapter 7 Bankruptcy

1. Generally

2. Ride and Pay

3. Advantages and Disadvantages of Reaffirmation Agreements

3.1 Advantages

(a) Keeping Contract in Force

(b) Post Bankruptcy Credit Reporting

(c) Invoices and Database Access

3.2 Disadvantage

4. Reaffirming Unsecured Debts

5. Rescission of Reaffirmation Agreements


1. Generally. For home and vehicle loans, a debtor that wants to keep the property may be required to sign a "reaffirmation agreement." A "reaffirmation agreement" is a contract which waives the bankruptcy discharge with respect to a particular debt. A person that signs a reaffirmation agreement must continue making the contract payments and will remain personally liable on the reaffirmed debt if he fails to pay. The reaffirmed debt will be completely unaffected by the bankruptcy filing, and will survive the bankruptcy discharge, as if the bankruptcy had never been filed. A debtor that does not reaffirm a debt can not be sued to recover a deficiency judgment if, during or after the bankruptcy cases ends, he defaults on the terms of the loan. Index

2. Ride and Pay. Under current law, a secured creditor can insist that the debtor either sign a reaffirmation agreement or surrender the collateral. However, as a practical matter, this rule is almost never enforced except by a select few vehicle finance companies (such as Ford Credit, Chrysler Capital and many credit unions). All major home mortgage companies and vehicle finance companies (except Ford Credit, Chrysler Capital and many credit unions) will permit the debtor to keep the collateral and continue to pay under the existing contract. The debtor gets to retain possession of the collateral and continue to pay; i.e. ride and pay. If she defaults, the creditor may enforce its pre-bankruptcy right to repossess and liquidate the collateral. The ride and pay option was abolished by the Bankruptcy Abuse & Consumer Protection Act of 2005. Nevertheless, it retains vitality as an informal option in most situations. Index

3. Advantages and Disadvantages of Reaffirmation Agreements. Index

3.1 Advantages. Index

(a) Keeping Contract in Force. The main advantage of signing a reaffirmation agreement is that the debtor can obtain 100 percent confidence that he will be able to keep the contract in force and retain possession of the collateral unless he defaults on his obligations. Index

(b) Post Bankruptcy Credit Reporting. Most all vehicle finance companies and mortgage lenders will continue to report payment history information (both positive and negative) to the major credit reporting agencies if the debtor signs a reaffirmation agreement. Many debtors want to attempt to reestablish their credit rating by relying on positive post bankruptcy reporting made by their mortgage and vehicle finance companies. On the other hand, mortgage companies and finance companies will generally refuse to report any payment history information to the credit reporting agencies (either positive or negative) if the debtor fails to sign a reaffirmation agreement. The reasoning is that un-reaffirmed debts are released in bankruptcy. The lenders believe that they can be accused of violating the discharge injunction, which prevents them from collecting un-reaffirmed debts, if they make any post discharge credit reports on debts that are not reaffirmed. Index

(c) Invoices and Database Access. Most secured lenders stop sending invoices on un-reaffirmed debts and prohibit access to loan databases unless the debtor reaffirms. The reasoning is the same as a creditor's refusal to issue credit reports on un-reaffirmed debt – the possible accusation that the creditor is violating the discharge injunction by sending invoices and permitting database access. The third advantage of reaffirming a secured debt is that creditors will generally resume sending invoices and allow debtors to regain access to websites that contain loan information once the debtor signs a reaffirmation agreement. Most people that reaffirm will want invoices and loan database access so that they can stay informed of the status of the loan without calling a representative. Index

3.2 Disadvantage. The disadvantage of signing a reaffirmation agreement is the fact that the debtor will remain personally liable on the debt. Not only will she loose the collateral if she can not pay for it, she will also be denied a fresh start free of burdensome debt – the reason why most people file for bankruptcy in the first place. Index

4. Reaffirming Unsecured Debts. Unsecured creditors will often solicit a debtor to reaffirm all or a portion of an unsecured debt by offering to extend additional post bankruptcy credit. The unsecured creditor will usually try to sell the reaffirmation agreement by arguing that the additional credit will help the debtor to reestablish a positive post bankruptcy credit history and minimize the adverse impact of the bankruptcy on the debtor’s credit report. It is almost never a good idea for a debtor to reaffirm a completely unsecured debt. Almost all debtors will have numerous sources for obtaining post petition credit, and can reestablish a positive post bankruptcy credit history without agreeing to pay any portion of the prior debt. Index

5. Rescission of Reaffirmation Agreements. The Bankruptcy Code permits a debtor to rescind a reaffirmation agreement at any time prior to the date the Bankruptcy Court issues a discharge order, or within 60 days after the reaffirmation agreement is filed with the court, whichever event occurs later. In other words, a debtor that signs a reaffirmation agreement can change her mind until the later of: Index

(a) the date the court issues a discharge order, or

(b) 60 days after the reaffirmation agreement is filed with the court.

The Bankruptcy Code states that a reaffirmation agreement can be rescinded merely by "giving notice of rescission" to the creditor. Written notice is not legally required; oral notice is sufficient. However, a debtor will find it virtually impossible to prove that she verbally gave notice of rescission. Therefore, as a practical matter, to properly rescind a reaffirmation agreement, the debtor (or her attorney) should always prepare and send a written notice to the creditor expressing her intent to rescind the agreement.

 

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