REAFFIRMING A DEBT
Reaffirming a debt means that the debtor agrees to be responsible for a debt that would otherwise be discharged. This procedure most frequently arises when a chapter 7 debtor has a secured vehicle loan. The loan agreement provides that if the debtor files for bankruptcy, that filing is a default and the lender can now repossess the vehicle even if the debtor is current on payments, has the vehicle insured, and has maintained the vehicle.
The Bankruptcy Code as amended provides that if debtor agrees to reaffirm the debt pursuant to an agreement (called a reaffirmation agreement), then the debtor can retain the vehicle and the lender cannot repossess so long as the debtor abides by the agreement.
Such an agreement is enforceable if it meets the requirements set forth in section 524(c) of the Bankruptcy Code. The basic requirements are that:
- The debtor is fully informed as to its contents and consequences and that the agreement is voluntary(If the debtor fails to pay and the vehicle is repossessed, the debtor will be responsible for any deficiency. The debtor cannot be forced or frightened into signing the agreement.)
- The agreement does not impose an undue hardship on the debtor(carrying out the agreement will not interfere with debtor’s ability to provide necessaries for the debtor and the debtor’s dependents.)
- If the debtor is represented by counsel, such counsel has advised the debtor of the consequences of the agreement and of any default of the agreement by the debtor.
- The agreement may be rescinded prior to discharge or within 60 days after it is filed with the court.
- The debtor has received all of the disclosures required by the bankruptcy code section 524(k)
- that: the total amount of the debt reaffirmed,
- the total fees and costs,
- the annual percentage rate charged on the debt (in either of 2 formats as set forth in the Bankruptcy Code section 524((k)(3)(E),
- the need for additional and continuing payments.
- the creditor retains a security interest in the property,
- retaining such an interest is in the regular course of the lender’s business between the creditor and the debtor and not an extraordinary requirement for which the debtor has been singled out,
- and, the retention of the interest and the entire agreement is being provided to allow the debtor to continue periodic payments, instead of allowing the lender to repossess the property since the filing of a bankruptcy constitutes a default of the agreement as originally entered into by and between the lender and the debtor.
- The agreement must be filed prior to discharge.
The court will review the agreement and determine if it meets the applicable legal standard as set forth in the bankruptcy code, is in the debtor’s best interest, and does not impose an undue hardship on the debtor or a dependent of the debtor. In making such determination the court will consider the following factors:
- What alternatives, other than reaffirmation, are available to a debtor who wishes to retain estate property;
- Whether the underlying debt is secured or unsecured;
- If the debt is secured, the threat of repossession of, and the amount of equity in, the collateral;
- The extent to which the collateral is a necessity; and
- The debtor’s payment history on the collateral.
- evaluation of a debtor’s Schedules I and J to determine whether the agreement imposes an undue hardship.
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