Reaffirmation Agreements and Bankruptcy
The reason re-affirmations on real property should be entered into lightly, is because the majority of the time the debtor can just without reaffirming, continue to pay on the mortgage and retain the property. By reaffirming, the debtor subjects himself or herself to the possibility of a foreclosure on the record after bankruptcy, a lawsuit for a deficiency balance, having to conduct a short sale to get out of the mess, or simply harming their credit by missing payments.
The debtor usually would not want to reaffirm real estate, as majority the time the debtors and that file Chapter 7 bankruptcy have the property that is not worth as much as they owe. Therefore, they would be reforming a negative equity asset.
A car payment is is a little bit different because, unlike a house, where the mortgage company is likely to accept payment even without a reaffirmation and allow the debtor to remain in the home, a car can get up and move or can get crashed. The lenders typically require a reaffirmation agreement unless the debtor purchases a car through something called redemption.
There are some state specific elements to reaffirmation for cars. For instance, if the debtor is current, the debtor might not have to reaffirm depending on the state’s ipso facto clause. Even if the lender can repossess the car without a reaffirmation, the lender might not, if the debtor continues to make payments. That will be specific to a lender in a state that allows them to repossess the car without a reaffirmation.
But typically, the debtor will have to reaffirm the debt on the car payment to keep the car through a reaffirmation.
Reaffirmation means you’re saying I could have discharged the debt, but I’m choosing to let the debt survived the bankruptcy. It does not have to be at the contract rate you brought into the bankruptcy case. It could be on better terms through a modification.
A reaffirmation does have to go through the bankruptcy court. It requires court approval, and the debtor’s budget needs to support the ability to pay the debt it’s reaffirming. The debtor needs to be able to prove they can make the payment.
Reaffirmation agreements are used in Chapter 7 bankruptcies, but they are not used in Chapter 13 bankruptcies, because in chapter 13 bankruptcy, the secured debt either survives the bankruptcy, or the debtor surrenders the property, so there’s no need to reaffirm a debt in a chapter 13 bankruptcy.
As the debtor in a chapter 7 bankruptcy you have to determine whether you want to reaffirm a secured debt or not. This primarily means whether you want to reaffirm your home mortgage or your car payment.
Finally, the debtor should be aware that re-affirmations are not do not impact title. They have nothing to do with ownership. What you are reaffirming is the debt, and it is generally not advisable to do when it comes to real property.