Saturday, October 13, 2012

Reaffirmation Agreements in Bankruptcy

What is a reaffirmation agreement in a bankruptcy case?

A person who files for bankruptcy is called a “debtor”.

A debtor may wish to repay a debt, even though that debt would normally be discharged in bankruptcy case. For example, a debtor may wish to keep his/her car.  To do so, the debtor enters into a reaffirmation agreement with the creditor who holds the loan/title to the car.  Reaffirmations are voluntary and not required by law. It is recommended that the debtor carefully consider whether or not the agreed upon payments can be made before entering into a reaffirmation agreement. Even though the debtor is current on his/her car payments, the car lender may repossess the car if a reaffirmation agreement is not made.

Any agreement to reaffirm must be made before the order of discharge is entered in a bankruptcy case. If you are in the process of reaffirming a debt and feel it will not be filed with the bankruptcy court before the discharge order is entered, then you should consider filing a motion to extend the deadline to delay entry of the discharge until the reaffirmation agreement is filed.

Reaffirmation agreements are strictly voluntary. 

If you wish to reaffirm (agree to pay back) any particular debt, you must enter into a written agreement with the creditor, which legally obligates you to pay all or a portion of a dischargeable debt i.e. a debt that would otherwise be discharge or wiped out by the bankruptcy. The form for this is Form 240A Reaffirmation Agreement.  
Here's a link to the form. Click here:

11 U.S.C. §524(K) tells you what is required to be covered in a reaffirmation agreement. 

The creditor and debtor must fully complete the form indicating the nature of the debt, the value of the collateral, and the reason for reaffirmation. Both parties to the reaffirmation must sign on the appropriate signature lines. If you are not represented by an attorney, the reaffirmation may be set down for a hearing where the bankruptcy judge will determine if it is in your best interests to reaffirm, based on your circumstances and the nature of the reaffirmation. For example, the court may not necessarily allow you to reaffirm a debt of $3,000 for a vehicle that may be worth only $1,000.

If a debtor reaffirms a debt and fails to pay it, the debt remains owed even though there was a bankruptcy case and the creditor can take action to collect the reaffirmed debt. This reaffirmed debt is not discharged or wiped out by the bankruptcy filing.

Is the bankruptcy court required to approve a reaffirmation agreement applicable to the home mortgage debt on my primary residence?

“No”.  The Court is not required to approve a reaffirmation agreement which applies to consumer debt secured by real estate. This applies to any mortgages on your home or other debts secured by your home. The court does not need to approve a reaffirmation agreement which applies to consumer debt secured by real estate per §524(c)(6)(B). This applies to any mortgages on the debtor's home or other debts secured by the home.

What about credit unions?
In addition, the bankruptcy court does not need to approve any reaffirmation agreements between debtors and credit unions. They are filed and become part of the record without a hearing.  See 11 U.S.C. §524(m)(2).

Do I need to be represented by a lawyer for reaffirmation agreements?                        
No, but do you really want to do this by yourself?  If you are not represented by a lawyer, the court may require that you personally appear in court regarding the filing of the reaffirmation agreement.  Further, you may wish to consult a lawyer to determine whether it is in your best financial interests to sign a reaffirmation agreement.

When do I make up my mind about reaffirmation agreements?

The Statement of Intentions in a bankruptcy petition requires the debtor to set forth whether he/she intends to retain or surrender the assets secured by property of the estate, and if the intent is to retain, the debtor must state whether he/she will redeem (which means to immediately pay the full loan balance, up to the value of the car, in a lump sum payment) or reaffirm pursuant to §524. 

11 U.S.C. §521(a)(2)(A) requires the debtor to file his/her statement of intentions within 30 days of the bankruptcy petition filing.  The bankruptcy court, for cause, may extend the time frames in § 521(a)(2)(A), but the motion to enlarge time must be made before the 30 days after the petition filing elapses.

11 U.S.C. §521(a)(2)(B) requires that the debtor perform his/her intentions within 30 days after the first date set for the §341 meeting. The bankruptcy court, for cause, may extend the time frames in § 521(a)(2)(B), but the motion to enlarge time should be made before the 30 days after the §341 meeting elapses.

Per 11 U.S.C. §521(a)(6), in a chapter 7 case for an individual holding personal property with a PMSI (purchase money security interest), the individual has 45 days from the first meeting of creditors to enter into a reaffirmation agreement under §524(c) or redeem under §722.

Now that I Have signed the reaffirmation agreement, when do I file it with the bankruptcy court?

Bankruptcy Rule 4008(a) requires the debtor to file the reaffirmation agreement within 60 days of the first meeting of creditors.  However, it is within the court’s discretion to at any time enlarge time to file a reaffirmation agreement.

If you definitely need to reaffirm a car loan and need more time to file it, consider filing a motion to extend the time pursuant to §521(a)(2)(B).

If you entered into a reaffirmation agreement and neglected to file it prior to discharge, you might be successful in bringing an application to reopen your Chapter 7 bankruptcy case after it closed (you pay the filing fee to reopen), to file it late, if the agreement was signed prior to the date of discharge. (Rule 4008 says the court at any time in its discretion may enlarge the time to file a reaffirmation agreement).

In many cases, with respect to a vehicle, it may not matter to a lender whether or not a debtor signs and files a reaffirmation agreement.  However, lenders such as Ford Motor Credit or Chrysler Financial have both been identified as lenders that require reaffirmation agreements for a debtor to keep his/her vehicle, even though the debtor is not in default on his/her car loan and has always made the payments on time.

What if I change my mind about reaffirming a debt?

Rescission per §524(c)(4): A reaffirmation agreement may be rescinded prior to discharge or within sixty (60) days of the reaffirmation agreement being filed with the bankruptcy court, whichever date is later, by giving notice of rescission to the holder of the secured claim. You should also consider filing a copy of the notice of rescission with the bankruptcy court so that your file is complete.

What if I don’t state my intentions or perform my intentions?

Per 11 U.S.C. §362(h)(1), the automatic stay as applicable to personal property secured by property of the estate is terminated if the individual debtor fails within the applicable time frames set by §521(a)(2)(A) to file the statement of intentions and §521(a)(2)(B) to timely take the actions specified in such statement of intentions.

Can I voluntarily repay a debt that has been discharged by your bankruptcy case, or without a reaffirmation agreement?

“Yes”.  Per 11 U.S.C. §524(f), a debtor may voluntarily agree to repay any debt that has been discharged.  However, this is purely voluntary and not legally enforceable.  For example, mom may have lent you the $1500 you needed to pay your lawyer’s fees to file your bankruptcy petition, and that $1500 debt is discharged.  Mom is not happy since you promised to pay her back.  However, to keep the peace at home, you may voluntarily pay mom back although you are not legally obligated to do so.

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