What is Reaffirmation, or Reaffirming a Debt? When a debt is "reaffirmed", the debtor will be personally liable for the debt even though the debtor has received a discharge. In other words, not only can the creditor proceed against any collateral securing the debt, but the creditor can collect the debt from the debtor directly:
Illustration. If a car lien creditor repossesses the debtor’s car, the creditor's resale of the car often will be for less than the retail value of the car, and yield insufficient proceeds to cover the outstanding debt. For example, if a car lien creditor repossesses and sells the debtor’s car for $11,000, leaving $9,000 of a $20,000 debt unpaid, the creditor can collect the $9,000 unpaid balance of the debt as a personal liability of the debtor. A creditor could obtain a judgment against the debtor, and try to collect on that judgment (for example, by garnishing the debtor’s wages, or attaching the debtor's bank account). If the debtor had not reaffirmed the debt, the creditor would be barred from collecting the $9,000 balance as a personal liability of the debtor.
As discussed below, a debtor should think very carefully before reaffirming a debt. Some reaffirmation agreements require court approval to be effective. Both the Reaffirmation Agreement and a Cover Sheet must be filed with the court.
Reaffirming a Debt When the Debt is Secured by a Lien on Property of the Debtor. When a creditor holds a lien against a debtor's asset (such as a car or real estate) and the debtor receives a discharge, the creditor is limited in its post-discharge collection efforts to taking action against the collateral securing its claim; because of the discharge, the debtor's personal liability on the debt associated with the lien is terminated and the creditor cannot collect from the debtor personally. As a result, a creditor may feel that the debtor, who has no personal liability related to the collateral after discharge, will not feel compelled to properly care for or maintain the collateral. In such cases, the creditor may conclude that the risk to its collateral, if left in the hands of a debtor who has no risk of personal liability, is so great that the creditor will want to seize its collateral at the earliest opportunity and minimize that risk (after the discharge has been entered). This is true even if the debtor is making payments on a current basis. Because filing bankruptcy is typically an event of default under the secured loan documents, the creditor can use the debtor's bankruptcy filing as a default entitling it to retake its collateral (by, for example, repossession or foreclosure). With respect to each securer debt, the debtor must indicate promptly in its bankruptcy filings what it intends to do with each creditor's collateral (for Chapter 7 cases, the debtor must indicate its intention by filing this form). When the creditor has a lien against property that the debtor intends to retain, and the debtor is worried that without reaffirmation the creditor may enforce its lien (by virtue of the default created by the debtor's bankruptcy filing) or the creditor feels that its collateral is in jeopardy because the debtor has no personal liability related to the collateral after discharge, the parties may agree that the debtor will renew its personal liability related to the collateral even if the debtor will otherwise receive a discharge. However, reaffirmation of the debt may not be in the debtor's best interest and the court may refuse to approve the agreement for the debtor to reaffirm its personal liability:
- The collateral may be worth far less than the debt, and there may be a substantial risk that the debtor will be unable at some point to afford to make the payments; if the debt has been reaffirmed, then the creditor can pursue all collection remedies against the debtor personally (including wage garnishment, bank account attachment, etc.).
- Sometimes a creditor may decide not to enforce its lien against collateral securing the debt (even though the debtor does not reaffirm the debt) so long as the debtor is remaining current in its payments.
Illustration. If the collateral is a car worth $10,000 securing a debt for $15,000, the creditor may decide that it will fare better to let the debtor keep the car so long as payments are kept current.
To help persuade the creditor to not enforce its lien, the debtor may choose to seek entry of an order under which the debtor is obligated, for example, to keep the car insured. See e.g., the Order in In re Wright, Case No. 14-00208 (June 6, 2014).
- Sometimes a secured creditor may realize that its collateral is not worth as much as the debt, and that upon repossession it will net a relatively small amount. On the other hand, the debtor may realize that to replace the collateral if it were repossessed would cost more than what the creditor would net. Such circumstances can lead to negotiated terms for a reaffirmation agreement (reaffirming a lesser amount of debt than the current debt) that leaves both the debtor and the creditor better off than if the creditor repossessed the collateral.
- Sometimes a secured creditor may be willing to reaffirm at a more affordable interest rate if the debtor cannot afford to make payments at the existing interest rate.
Alternative of Redeeming Property. An individual debtor in a Chapter 7 case may "redeem" tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt by paying the lienholder the full amount of the fair market value of the property. The act of redeeming such consumer goods typically require the filing of a motion asking the Court to approve the redemption of the consumer goods from the secured creditor. Redemption almost always requires a lump sum payment to the secured creditor. Some lenders will make post-petition loans to a debtor based on the current value of the collateral to enable a debtor to redeem the collateral (for example, an automobile) from the lien of a prior lender. Or a debtor may be able to obtain assistance from relatives or friends to accomplish a redemption. If the collateral is worth less than the debt, or the interest rate on the existing debt is high, redemption of the collateral may be a more attractive option than reaffirming the debt (or, even though any new loan utilized to effect the redemption will be a debt for which the debtor is personally liable, it may be a better outcome than not reaffirming the debt but continuing to pay the existing debt). If a Chapter 7 debtor files its Statement of Intention, indicating that the debtor intends to redeem the property rather than reaffirm the debt on its current terms, the lienor may be willing to agree to more favorable reaffirmation terms.
Reaffirming a Debt as a Moral Obligation. If the debtor feels a moral obligation to repay a particular debt, there is no need to reaffirm the debt in order to fulfill that moral obligation. Following entry of the discharge, a debtor may voluntarily repay any debt, even though the debt was never reaffirmed. Because of the discharge, creditors are barred from asking for or demanding repayment of any discharged debt, in whole or in part, but the debtor may choose to voluntarily repay all or any part of any discharged claim, for whatever reason.
Rescission. The debtor may rescind (cancel) the reaffirmation agreement at any time prior to discharge or within sixty days after the agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of the claim.
Basic Requirements for an Effective Reaffirmation Agreement. To put into place a reaffirmation agreement, the debtor and creditor execute a written agreement along the lines of the suggested Reaffirmation Agreement form. Then either the debtor or the creditor files the reaffirmation agreement with the Clerk’s Office.
The following are requirements for a reaffirmation agreement to be effective:
- the reaffirmation agreement must be made before the granting of the discharge;
- the reaffirmation agreement must comply with the disclosures required by 11 U.S.C. § 524(k) (elicited by the suggested Reaffirmation Agreement form);
- if the debtor was represented by an attorney in the course of negotiating the agreement, the attorney must execute Part C of the Reaffirmation Agreement;
- if the debtor was not represented by an attorney in negotiating the agreement, the debtor must appear in person at a hearing at which the court gives the debtor certain information, and (unless the debt is a consumer debt secured by real property) the court must enter an order approving the reaffirmation agreement (11 U.S.C. § 524(c)(6) and § 524(d));
- the debtor must not have timely rescinded the agreement (see Rescisssion above);
- the debtor must comply with Fed. R. Bankr. P. 4008(b) (with the Cover Sheet); and
- if part D of the reaffirmation agreement raises a presumption of undue hardship under 11 U.S.C. § 524(m) (because the debtor's monthly income is less than the debtor's monthly expenses), and the creditor is not a credit union, the agreement will not be effective if it is disapproved on the basis that the presumption of undue hardship has not been rebutted.
Deadline for Entering Into the Reaffirmation Agreement; Deadline for Filing the Reaffirmation Agreement. Two different deadlines apply to reaffirmation agreements:
- Deadline for Making Reaffirmation Agreement. The reaffirmation agreement must be executed before the debtor’s discharge is entererd. The court has no discretion to enlarge that deadline. However, the court, on motion of the debtor, can delay the entry of the discharge in order to permit the reaffirmation agreement to be timely executed before the discharge is entered.
- Deadline for Filing Reaffirmation Agreement. Under Rule 4008, the reaffirmation agreement is required to be filed no later than 60 days after the first date set for the meeting of creditors under 11 U.S.C. § 341. The court may extend that 60 day deadline.
When a Hearing is Required. The court will hold a hearing on a reaffirmation agreement when either:
- the debtor was not represented by an attorney in the course of negotiating the agreement, or
- the reaffirmation agreement raises a presumption of undue hardship that the court wants to address at a hearing.
If the debtor was not represented by an attorney in the course of negotiating the agreement, the debtor must appear in person at the hearing in order for the reaffirmation agreement to be approved.
Disapproval of Reaffirmation. In certain cases, the court may disapprove a proposed Reaffirmation Agreement. However, with respect to, e.g. car loans, the court, if requested by the debtor, may enter an order clarifying that for example, the debtor will keep the collateral insured which may cause the creditor not to repossess the car so long as the debtor is current on payments.
A creditor may still accept payments under a reaffirmation agreement that is disapproved by the court, if the creditor believes in good faith that the reaffirmation agreement is effective. See 11 U.S.C. § 524(l)(2).
Delay of Discharge When a Presumption of Undue Hardship Has Arisen. When part D of a reaffirmation agreement raises a presumption of undue hardship under 11 U.S.C. § 524(m), the discharge will not be issued so long as the presumption is in place. If the court does not earlier enter an order declaring that the presumption of undue hardship has been rebutted to the satisfaction of the court, the presumption lasts for 60 days after the reaffirmation agreement is filed (unless the court orders such 60-day period extended before it expires). If part D of the reaffirmation agreement does not contain an explanation that rebuts the presumption of undue hardship to the satisfaction of the court, the court attempts to set a hearing (to be held before the presumption expires) to address whether to disapprove the reaffirmation agreement.
Remedies if the Creditor Attempts to Collect Pursuant to an Ineffective Reaffirmation Agreement. If a reaffirmation agreement is or becomes ineffective, and the debt is discharged, the discharge injunction of 11 U.S.C. § 524(a)(2) (except as provided in § 524(l) as discussed above), bars the creditor from collecting the debt as a personal liability of the debtor (but the creditor may collect the debt as permitted by non-bankruptcy law from property on which it has a security interest or other lien securing payment of the debt). If the creditor attempts to collect the discharged debt as a personal liability of the debtor, and refuses to stop such collection efforts, the debtor may file a motion to hold the creditor in civil contempt for violating the discharge injunction. If the motion is granted, the court may impose sanctions against the creditor, including repayment of the sums collected in violation of the discharge injunction. The debtor may wish to employ counsel to pursue this remedy: if the creditor is held in civil contempt for violating the discharge injunction, part of the debtor’s recoverable damages include reasonable attorney’s fees.
WARNING: The foregoing highlights certain aspects of reaffirmation agreements, but should not be taken as constituting legal advice. If you need legal advice regarding a reaffirmation agreement, you should consult a duly licensed attorney or attend a session at the Bankruptcy Assistance Center.