How do reaffirmation agreements work and what are my options? Chapter 7 debtors, if they end up passing the means test, can discharge all of their unsecured debts. Secured assets are normally sold by the Trustee in Bankruptcy or the creditor with the security interest acquires the property.
Chapter 13 is a possible option for debtors with a lot of secured property who want to keep their property. Chapter 13 debtors propose a plan to pay the arrears and continue the monthly payments. The plan has to be approved by the Trustee.
Some Chapter 7 debtors can save their assets through their state or federal personal exemptions. These exemptions, if the math is right, let a debtor keep a car, work tools and other assets. In order for the math to work correctly, the equity in the property has to be less than the exemption.
Debtors with enough cash may be able to buy one or a few items outright at fair market value.
Fortunately, there is another option for Chapter 7 debtors. That option is known as a reaffirmation agreement. Essentially, it allows debtors the right to keep certain secured personal property provided the creditor agrees to continue the loan, the debtor keeps up the monthly payments and an agreement can be made on how the arrears will be paid.
Debtors cannot save their real property through a reaffirmation. Just personal property can be saved.
Debtors shouldn’t rush into a reaffirmation agreement. Debtors filed a Chapter 7 in the first place because they couldn’t pay their bills. The key idea behind a Chapter 7 is that a debtor gets a new start by eliminating their bills.
Reaffirming a debt means the debtor will be acquiring a new bill. Moreover, if a debt is reaffirmed the debtor must pay the bills. He or she cannot file another bankruptcy until many years after the first bankruptcy is discharged.
Keeping Your Secured Assets
The creditors have added a new wrinkle to obtain a ‘Fresh Start’. Before the Bush Bankruptcy, you had 4 ‘options’ regarding a secured debt. You could
- Redeem or
- Pay and Retain
If you reaffirm on a debt, then you are personally liable for the debt and if the car gets into an accident and it’s underwater, namely, you owe more on the car than it’s worth, then you are liable for the difference.
When you surrender a car, you know that it’s simply turning possession of the car to the finance company. You won’t owe any money with this scenario but you also won’t have your car.
You can redeem your car by paying off its present value but most consumers can’t get financing for this option.
The retain and pay option was a court created option. Bush and his credit card cronies have tried to eliminate this practical option for the consumer. You would simply pay for the car or you didn’t retain it under this option.
A Fresh Start
As much as President Bush and his corporate backers have tried to eliminate ‘America’s Fresh Start’, they really haven’t succeeded to the degree they were striving.
The credit card industry is declaring that their efforts have been successful that fewer people are now filing for bankruptcy but they have taken no responsibility for pushing credit cards the way drug pushers market their drugs with free samples, lower introductory offers, waiving monthly payments, etc.
People are still receiving a ‘fresh start’ through a Chapter 7 bankruptcy and for you to learn more about obtaining a fresh start, call us today for a free and confidential consultation or you can use our on-line evaluation.
What is a reaffirmation agreement?
A reaffirmation agreement is a new contract between the Chapter 7 debtor and the secured creditor in which the debtor agrees to continue paying a dischargeable debt (such as an auto loan) after the bankruptcy. The secured creditor agrees to not repossess the property.
Reaffirmation agreements are only available to Chapter 7 debtors.
Reaffirmation agreements are typically used to continue payments on secured property the debtor wishes to retain, like a car or house.
A debtor that reaffirms a debt is personally liable for any subsequent default on the loan. The debtor may be sued by the lender for any new default and the property may be repossessed.
This is a serious consideration since the debtor is not eligible for another Chapter 7 bankruptcy discharge for eight years, and is not eligible for a Chapter 13 discharge for 4 years.
What if the debt is not paid?
If the debt on the reaffirmed item is not paid, it is likely that a creditor will repossess the item and report the failure to pay and the repossession to the credit scoring companies like Equifax and Experian. It is precisely because reaffirmation of a debt is dangerous that reaffirmation agreements must be approved by the US Federal Bankruptcy Judge assigned to the case.
There are some positive trade-offs though. Creditors may be willing to renegotiate the debt because repossessions and resales cost a lot of money too – money that the creditor is unlikely to get back from the debtor.
Debtors who get rid of most of their debts through a Chapter 7, to some extent, are considered better risks because they only have to pay the reaffirmed debt and not other bills. Here are a few of the common types of reaffirmation agreements.
Reaffirming a car loan
Most people who buy a new or even a used car usually finance it. Part of the finance arrangement is that the buyer gives the finance company a security interest in the car.
The other part of the finance agreement is a deal to pay a certain sum each month until the loan is paid in full. People who reaffirm car loans agree to keep paying the monthly sum. Some creditors will agree that the arrears be paid on the back end.
This means the loan will be extended enough months to pay the arrears. Debtors can also offer to pay a little extra each month, for the original length of the loan, to pay off the arrears. Creditors, especially smaller ones, may even agree to lower the interest rate on the loan. There is no disadvantage in asking. The worst that will happen is the creditor will say no.
Some debtors pay off their original purchase car loan but then borrow against the vehicle because they need extra cash. The party giving the loan will also take a security interest in the car. These non-purchase loans can be easier to negotiate a new deal because the cars are older and not worth as much. Creditors of secondary loans often know cash in hand is better than a resale which may be hard and not yield much money.
Another way to argue for a renegotiation of a car loan is to check the guide books for car values. Many cars lose value as soon as they are driven off the dealer’s parking lot. As each year and each mile of usage goes by, the car continues to lose value. Since the value of the creditor’s security interest is only what the car can bring in if it is resold, debtors can argue that the loan should be paid only up to the real value of the automobile, truck or other personal vehicle.
Cars are the key possession people want to possess. Here are some other personal items to consider asking for reaffirmation agreements too. Many of the thoughts that apply to car loans apply to these personal items too.
Reaffirming furniture, appliances and consumer electronics
Most furniture and appliances aren’t worth too much. While it’s expensive to purchase these items, the resale values are minimal because the items get scratched, they start to need repairs and they are hard to move. Many creditors are usually happy to work out a deal because it’s just not worth the trouble to repossess these items.
Debtors can often renegotiate loans for jewelry by showing that the jewelry’s value is minimal. A lot of jewelry is only worth money to the person holding it. Resale values are often low so the debtor can renegotiate the loan based on the low value.
Reaffirming tools of the trade
These items can be important to a debtor because they help provide income. As with many other personal items though, they can lose value over time. Because creditors can only get the value of the item they repossess, re-negotiations are possible.
In Personam vs. In Rem
An unsecured debt, like a medical bill, is backed by a promise to pay. If the debtor does not pay, the creditor’s only recourse is to sue him personally. This is called an in personam obligation (Latin for “against the person”).
A secured debt, like a car payment, is also an “in personam” obligation. If you don’t pay Ford Motor Credit for your 2012 Ford Fusion, you may be sued for the money. However, Ford may also retain a lien against the Fusion to ensure payment.
The lien on the vehicle is an “in rem obligation” (Latin for “against the property”). If you default on the note, Ford can repossess your Fusion.
Can the creditor enforce its in rem rights against the property?
Yes. In bankruptcy in Connecticut for instance, if the in personam obligation is enjoined by the Chapter 7 discharge, the creditor can still enforce its in rem rights against the property.
The bankruptcy discharge does not generally strip away that secured lien, so the creditor could foreclose or repossess after the bankruptcy discharge, but cannot sue the individual on the debt.
You can keep your car through a reaffirmation agreement
How does a bankruptcy debtor keep a house or car after bankruptcy? The typical answer is to continue the debt with the creditor through a reaffirmation agreement.
The reaffirmation agreement must contain certain disclosures
The Bankruptcy Code requires that a reaffirmation agreement must contain disclosures concerning the contract terms.
The debtor must also file a statement of current income and expenses. If the debtor’s income, after expenses, is not enough to pay the monthly loan, the court may decide to not approve the reaffirmation agreement.
The debtor’s attorney must certify to the bankruptcy court that the debtor was advised of the legal effect and consequences of the reaffirmation agreement, and that the reaffirmed debt will not create an undue hardship for the debtor or the debtor’s family.
Change the Terms
Now, since a reaffirmation agreement is a basically a new contract, the parties are both able to alter the terms of the original agreement. This can mean a lower interest rate or a longer payment term to make the monthly payments more affordable.
Creditors are sometimes agreeable to these changes because the alternative is a costly repossession.
While the reaffirmation process is a voluntary process, the creditor is generally not anxious to repossess the property, and the debtor usually has more leverage in bankruptcy to negotiate a better deal with the creditor.
It’s time to file with the Court
To reaffirm a debt, the agreement must be filed with the bankruptcy court before the bankruptcy discharge is entered.
Under Rule 4008(a) of the Federal Rules of Bankruptcy Procedure, reaffirmation agreements “shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a) of the Code.” But it’s important to note that several courts have pointed out that this rule conflicts with the Bankruptcy Code and should be disregarded.
The statutory deadline for filing a reaffirmation agreement is any time before a discharge. 11 U.S.C. § 524(c)(1).
What happens if we file after the deadline?
Failure to timely execute a reaffirmation agreement causes the automatic stay to be lifted and the property is no longer a part of the bankruptcy case.
The creditor may then assert its state law rights and possibly repossess the property even though you are current on the loan. This situation recently was discussed in the Ninth Circuit Court of Appeals case Dumont v. Ford Motor Credit Company
Rule 4004(c)(2) of the FRBP also provides a vehicle for delaying the entry of discharge at the request of a debtor.
Rule 4008(a) also permits the time for filing reaffirmation agreements to be enlarged “at any time.” However, the Bankruptcy Code still requires reaffirmation agreements to be entered into before a debtor’s discharge.
Both the statute and applicable case law make it clear that a reaffirmation agreement will be unenforceable if it is not made before the granting of a discharge.
Consequently, the reaffirmation agreement filed post-discharge will not be effective, and a motion to vacate a discharge in order to file a reaffirmation agreement should and probably will be denied.
Is there a revocation option?
A Chapter 7 debtor can revoke, or rescind, a reaffirmation agreement by filing a rescission within 60 days after the date he signed the agreement or any time before the court discharges the case.
Rescinding the reaffirmation agreement requires notice to the creditor, who may then repossess the secured property, but the debt will be discharged.
A rescission generally has no negative impact on a Chapter 7 bankruptcy, although you have to keep in mind that every case is different
The Ride Through
Some states allow debtors to retain possession of secured property so long as the borrower is current on his payments. Consequently, even if the debtor fails to timely file a statement of intention or a reaffirmation agreement, the creditor cannot repossess the collateral under state law so long as the payments are current.
A ride through effectively converts the creditor’s note into what is known as a “non-recourse debt.” If the debtor stops paying the debt, the creditor cannot sue the debtor because the in personam obligation was discharged. The creditor’s only recourse is to repossess the property.
What if my Reaffirmation Agreement is rejected?
Since a reaffirmation agreement must be certified by the debtor’s attorney and accepted by the bankruptcy court, what happens if the debtor submits a reaffirmation agreement that is not approved, but the debtor is current on the payments?
Many bankruptcy courts that have addressed this situation find that the creditor cannot repossess as long as the underlying contract is not breached.
It’s good news that the bankruptcy courts agree that all the debtor must do is timely sign and file a reaffirmation agreement.
If the court disapproves the agreement, the lender cannot repossess the property so long as the debtor makes the payments on time and keeps the property insured.
I’ve heard of Ipso facto, what is Ipso facto?
This situation calls into question the enforceability of “ipso facto” bankruptcy clauses that is found in many consumer contracts. “Ipso facto” comes from the Latin phrase meaning “by the fact itself,” and means that filing a bankruptcy case triggers a default in the agreement entitling the other party to terminate the agreement and begin exercising remedies.
But, the fact remains that ipso facto clauses are generally not enforceable in bankruptcy cases. Filing bankruptcy by itself, is not enough to trigger a default. Section 541(c) provides that property becomes bankruptcy estate property notwithstanding an ipso facto clause.
Likewise, Section 365(e)(1) of the Bankruptcy Code expressly invalidates ipso facto clauses that might otherwise result in forfeiture of an executory contract or an unexpired lease.