REAFFIRMATION AGREEMENTS IN BANKRUPTCY
If you have debt which you want to retain in your case you may be required to sign a reaffirmation agreement in order to prevent the collateral from being taken after your discharge. The most common questions we see here in our practice in Georgia is:
- What is a reaffirmation agreement?
- Which creditors require a reaffirmation agreement?
- Will the creditor keep reporting your payments on your credit?
WHAT IS A REAFFIRMATION AGREEMENT?
Individuals who file for bankruptcy protection do so to eliminate their debt and to obtain a financial “fresh start.” Not all debts are dischargeable, but most common consumer debts are. In some cases, a debtor may wish to keep making payments on debt even though that debt can be discharged in their bankruptcy. When a debtor agrees to pay such a debt by contract, the debtor must enter into a reaffirmation agreement with a creditor to “reaffirm” the debtor’s intent to pay. By entering into a reaffirmation agreement the debtor will be contractually bound to pay the otherwise discharged debt even if, at some point during the life of the agreement, the debtor is unable to make the payments.
WHICH CREDITORS REQUIRE A REAFFIRMATION AGREEMENT?
The decision to reaffirm a personal liability on secured debt depends on the type of secured debt. If the secured debt is real property (i.e. a mortgage loan on a residence), the debtor is reaffirming any personal liability that would be owed under the note. If the debtor enters into a reaffirmation agreement, he or she is liable for that amount. Here in Georgia, most Chapter 7 bankruptcy clients have to decide if they wish to reaffirm on their cars and mortgage loans.
If you have a vehicle and you wish to retain that car and keep making your payments then you will be required to sign a reaffirmation agreement, Otherwise, the debt will be discharged with your case and even if you are current on your payment the lender may repossess the vehicle. While some car creditors may allow you to “retain and pay” without signing a reaffirmation agreeement, there is no legal requirement for them to allow you to do so without a reaffirmation agreement signed and filed in your bankrupty case.
Under § 521(2)(a), within 30 days of the filing of the petition or before the first date of the meeting of creditors, a debtor shall file with the court his or her statement of intentions, indicating whether the debtor intends to reaffirm or redeem the property in question for each secured debt. Under § 521(2)(b), the debtor has 30 days after the first date of the meeting of creditors to perform her stated intention. In regards to personal property (i.e a vehicle loan), the debtor may not retain possession of the property unless he or she enters into a reaffirmation agreement within 45 days of the first meeting of the creditors.
In Georgia, debtors are not required to sign off on a reaffirmation agreement in order to retain their property. They can allow the loan to discharge but continue to make payments to the lender. This means that if for some reason after the discharge of the case, the debtor cannot afford the home, they can simply walk away from the home and the lender cannot pursue any collection on the mortgage loan.
While we don’t recommend reaffirmation on mortgage loans we do understand why some debtors still opt to do so on a first mortgage. Many times, in the case of a first mortgage, the benefit in signing a reaffirmation agreement is that the lender will usually agree to resume sending mortgage statements. The lender may also agree to resume credit reporting activities which will help rebuild credit.
In addition, signing a reaffirmation agreement may also allow the debtor to entertain the full range of assistance programs offered by the lender, and they may be eligible for a loan modification where they might otherwise be disqualified (because with no liability on the underlying note, some lenders may determine that modification of the underlying note is not feasible to the extent that it is unenforceable except through foreclosure). With this said, some lenders will continue to work with debtors even if there is no reaffirmation agreement. In regards to second mortgages, I would strongly encourage clients not to sign a reaffirmation agreement on a second mortgage. There is generally no benefit to signing a reaffirmation agreement on a second mortgage.
You need to keep in mind that different lenders treat loan modifications post-bankruptcy discharge differently. The Home Affordable Modification Program (HAMP) guidelines may allow modification at the servicer’s discretion but some lenders have other policies against any modifications post-bankruptcy. Each case is different, and the results can vary from loan to loan and lender to lender. If you are thinking about bankruptcy you may want to contact your lender first to see what their policy is in regards to post-discharge options for their customers.
WILL THE CREDITOR CONTINUE TO REPORT TO THE CREDIT BUREAUS IF YOU REAFFIRM ON THE DEBT?
One of the most hotly debated topics I hear regarding reaffirmation agreements and credit is whether the lenders will report on your credit report if you reaffirm on a debt. There is no provision of the Fair Credit Reporting Act, nor the bankruptcy code, which imposes an affirmative duty upon any creditor to make reports to the credit bureaus. This is true, even in cases that don’t involve a bankruptcy case. Under FCRA, creditors are only obligated to make accurate reports. There is no authority to compel them to make a report at all. Failure to report payments does not constitute a violation of the discharge injunction.
If you have any questions and reaffirming debt or bankruptcy in general, please feel free to contact our office at [email protected] or 404-889-8663
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