The term bankruptcy describes a wide variety of legal processes intended to assist individuals and businesses in obtaining a clean financial slate. For consumers specifically, there are two types of bankruptcy: Chapter 7 and Chapter 13. These are named after the chapters of the Bankruptcy Code that govern the respective types of bankruptcy.
- Chapter 7 bankruptcies are liquidation bankruptcies, which are also known as “straight” bankruptcies. Specific debts are discharged or liquidated under bankruptcy law. Most individuals with personal debts file bankruptcy under Chapter 7; and
- Chapter 13 bankruptcies are reorganization bankruptcies. The individual filing for bankruptcy establishes a repayment plan in order to resolve the debt.
In cases involving bankruptcy proceedings, a reaffirmation agreement is a type of contract between a debtor and their creditor. Some bankruptcy proceedings, such as Chapter 7 filings, discharge specific debts through the bankruptcy process, but not others. A reaffirmation agreement essentially states that the debtor will pay some or all of the debt, instead of having it discharged. In exchange, the creditor commits to refraining from repossessing collateral property from the debtor.
A reaffirmation agreement can often have better effects on the debtor’s credit in the long run, as opposed to having all qualifying debts discharged. The purpose of reaffirmation agreements is to provide the debtor with a better outcome, and the creditor with ease of recollection. Debtors have sixty days in which they may revoke the agreement, in which case they would need to accept any consequences for doing so.
Reaffirmation agreements are typically used in situations where a debtor wishes to maintain certain collateral throughout the bankruptcy process, such as their car or their house. Reaffirmation agreements allow the debtor to retain the collateral that is secured debt, while also allowing the creditor to enforce the debt in accordance with the reaffirmation agreement’s terms. Thus, it is important to carefully read your obligations under the reaffirmation agreement, before executing one.
Why Would a Debtor Sign a Reaffirmation Agreement?
When a debtor signs a reaffirmation agreement, the debtor is in essence executing a reaffirmation of debt with the creditor. Thus, a reaffirmation agreement essentially reinstates the borrower’s obligation to repay the debt in full. In return, the lender promises not to foreclose on the borrower’s property, or to repossess any property that has previously been designated as collateral on a debt. This promise remains in effect so long as the borrower continues to make good on their scheduled payments.
Thus, the reason that a debtor would sign a reaffirmation agreement is simple, the debtor wishes to maintain some collateral throughout the bankruptcy process. Once again, the most common pieces of collateral that a debtor wishes to maintain are vehicles and property.
What Are the Requirements for a Valid Reaffirmation Agreement?
There are a few elements that must be fulfilled for the filing of reaffirmation agreements. These elements include:
- The court must receive the reaffirmation agreement before the debtor has received a discharge on the debt;
- The agreement must be entered into in a voluntary manner, meaning no party involved may be coerced into doing so; and
- In some cases, the debtor must be able to cancel the reaffirmation agreement within two months of filing with the court. Debtors must be granted sixty (60) days in which to revoke the agreement. After that time period, the debtor must accept the consequences.
If only one party involved is represented by a lawyer while the other is not, the bankruptcy court must verify that this will not cause any serious problems for the unrepresented party before proceeding. However, it is best if both parties are represented by lawyers, in the interest of fairness and equality.
To ensure that creditors do not defraud their debtors, reaffirmation agreements must be:
- In writing;
- Filed with the court; and
- Certified by the debtor’s attorney
Either the debtor’s attorney or the bankruptcy court must certify that the agreement will not cause the debtor any undue hardship once the bankruptcy is over. Additionally, they must certify that the agreement is in the debtor’s best interest. As the debtor’s best interest and lack of undue hardship are both high standards, most debtors’ attorneys are hesitant to accept a reaffirmation agreement unless the agreement does favor the debtor.
What If the Debtor Continues Making Payments without Court Approval?
The debtor may sometimes continue making payments during bankruptcy, and the creditor does not repossess the property. The parties act as though the debtor never filed for bankruptcy; in many respects, the debtor has an informal reaffirmation agreement during the bankruptcy itself.
This is referred to as a ride-through agreement. Ride-through agreements are controversial due to the fact that they operate outside of the sanction of the Bankruptcy Code. Additionally, the debtor may be foregoing opportunities in which they could lower the amount they must pay.
During the bankruptcy process, debtors may often reduce the value of the property down to fair market value (FMV), as opposed to current value. If the FMV is lower than the current amount that the debtor owes to the creditor, ride through agreements as well as reaffirmation agreements would be unwise.
What If a Reaffirmation Agreement Is Violated?
Generally speaking, a reaffirmation agreement creates a legal obligation for the debtor to pay back the entire agreed-upon amount that they owe to the creditor. As such, a violation can occur if the borrower fails to make repayments as specified in the agreement. A violation may result in the lender repossessing some of the borrower’s property. If repossession does not fully cover the debt owed, the lender may sometimes file a personal judgment against the borrower in order to obtain the remaining amounts.
Likewise, a lender may violate a reaffirmation agreement by attempting to enforce collections, or by taking actions that are not covered in the agreement. Additionally, the use of fraud or misrepresentation in order to gain the borrower’s agreement may lead to legal action. Such behavior could be considered coercion and may result in judgment against the lender.
Most debtors go into bankruptcy for the purpose of discharging their debts. Reaffirmation means that the debtor is promising to repay the debt, even though the debt would have been discharged. To put it in other words, the debtor would be forfeiting the reason they went into bankruptcy in the first place.
An effective bankruptcy would mean that the debtor will no longer be legally obligated to repay the debt. If the debtor has a moral or social reason for wanting to repay the creditor after the bankruptcy is over, the debtor can do so. The debtor does not need a reaffirmation agreement to repay the debtor.
Do I Need an Attorney for Help with a Reaffirmation Agreement?
Reaffirmation agreements create binding legal obligations for all parties involved. Because of this, it is especially important for the borrower to pay attention to the terms, as they will once again be required to repay the debt in full. You should consult with a skilled and knowledgeable bankruptcy lawyer.
An experienced bankruptcy lawyer can assist you with a reaffirmation agreement, as well as draft and review the agreement terms before you sign it. Additionally, should any disputes arise over a violation, an experienced local attorney will also represent your interest in Court, as needed.