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Bankruptcy Advice for Secured Creditors: Reaffirmation Agreements

I don’t think I can count the number of times I have had to explain to bankers, mortgage companies, and finance companies the reason that in a Chapter 7 Bankruptcy, they should ALWAYS want, and if possible require the execution of a reaffirmation agreement with respect to a secured debt. Many a time I have received a call from a secured Creditor stating that they wanted to advise a Chapter 7 Debtor that they were refusing to accept a reaffirmation agreement. That is a classic example of cutting off your nose despite your face. It would be akin to punishing Popeye by putting him on a straight diet of spinach or throwing Br’er rabbit into the briar patch. A reaffirmation agreement is a one way street benefitting only the secured Creditor and adversely affecting only the Debtor. A secured Creditor is extremely foolish not to want a reaffirmation agreement on every secured debt.

The reasoning for this explained below:

In a Chapter 7 bankruptcy the Bankruptcy Code clearly states that, with respect to every secured debt, the Debtor must perform one of three options. A Chapter 7 Debtor must either:

  1. surrender the secured property to the Creditor

  2. “redeem” the debt

  3. execute a reaffirmation agreement

If a Chapter 7 Debtor wants to retain property secured by a loan, he or she must either:

(2) redeem the debt or (3) execute a reaffirmation agreement

If the Debtor chooses redemption as provided in §722 of the Bankruptcy Code, he or she actually pays off the entire debt securing the loan. This only applies to security that is personal property intended primarily for personal family or household use. Since most people in bankruptcy can’t afford this option it rarely occurs . Accordingly, if the Debtor wants to retain the collateral their only remaining alternative is the execution of a reaffirmation agreement as provided for in §524 of the Bankruptcy Code.

**Note: (reaffirmation agreements do not apply to Chapter 13 payment plan bankruptcy cases)**

Why Creditors Need Reaffirmation Agreements and What They Accomplish:

A reaffirmation agreement preserves the Debtor’s liability on the debt after the bankruptcy is over.

Creditors who fail to execute a properly formulated reaffirmation agreement and/or fail to have it properly recorded with the bankruptcy court will lose their ability to pursue collection once the Debtor receives his or her discharge.

Upon discharge of the case the Debtor will be forever relieved of financial responsibility for the debt. In that situation, although the Creditor would still have the right to take possession of its collateral, the Creditor can never again lift a finger to try to collect a penny from the Debtor. In the real world, what this means is that if the Creditor cannot recover possession of its collateral, or the value of the collateral is not sufficient to pay off the debt when it is sold, the Creditor will be left holding the bag on the deficiency with no further recourse.

If properly formulated, executed, and recorded, a reaffirmation agreement

preserves the Creditor's right to sue after the Debtor's bankruptcy is over.

If a reaffirmation agreement is properly executed and filed with the Court, the discharge issued in the bankruptcy does not wipe out the debt or relieve the debtor of liability and therefore the Creditor may pursue the deficiency claim against the debtor just as they would if no bankruptcy had ever been filed. In other words, the reaffirmation agreement preserves the right for creditor to sue for a deficiency after the bankruptcy is over which they cannot do without the reaffirmation. The reaffirmation agreement does absolutely nothing to help the debtor. It only benefits the Creditor. This is why threatening a Debtor with a refusal to accept a reaffirmation agreement is .... well, stupid.

Prior to the major overhaul of the Bankruptcy Code in 2005, a reaffirmation agreement was a simple document, usually consisting of one page. This is no longer the case. A reaffirmation agreement now is a document seven or eight pages long chalked full of details regarding the debt and explaining over and over to the Debtor their rights with respect to the reaffirmation agreement and the legal effect of executing one. If the document is not in proper form and properly filed with the Bankruptcy Court prior to the entry of the discharge it will not be effective to preserve the Debtor’s liability on the debt.

If you'd like to learn more about reaffirmation agreements or anything else pertaining to Creditor's rights please give us a call, we would be happy to help.

Wessler Law Firm is a small family owned bankruptcy law firm.

We have been helping both Creditors and Debtors since 1982.


Disclaimer: This article is meant for reference only, and is not intended to be legal advice.

For legal counsel regarding your situation, please consult an attorney licensed in your state.

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