What Are Reaffirmation Agreements?
California Chapter 7 Laws
It is important to understand the legal ramifications of a reaffirmation agreement in a bankruptcy filing. It is NOT intended to protect the borrower! In fact, it rebinds you to the original loan agreement and takes away the protection that bankruptcy would otherwise grant. This benefits the creditor because it leaves open their right to sue you in the case of a default.
If you sign a properly executed reaffirmation agreement and the bankruptcy judge approves it during the filing of your case, you will be legally bound to the original debt even after you receive a discharge of your debts at the conclusion of your bankruptcy.
Debtors who file for Chapter 7 bankruptcy may have a creditor try to impose a reaffirmation agreement on personal property they want to keep that is securing a loan. The most common situation is a vehicle, but it could be any type of personal property. Two distinctions to keep in mind are:
- Real estate is not personal property.
- Reaffirmation agreements can NOT be imposed in a Chapter 13 bankruptcy.
A common example of how a reaffirmation agreement can adversely affect a debtor involves an auto loan with a balance owed that exceeds the actual worth of the vehicle. If you have an auto loan with a balance $10,000 and the car that is securing the loan is only worth $7,000, then you have an unsecured portion that is $3,000. In other words, you owe $3,000 more then the car is worth. If you default on that loan, the lender will most likely repossess the car and try to auction it off to recover the money you owe. If they succeed in selling your vehicle for $7,000, you will still own them the remaining $3,000! If you signed an affirmation agreement, they are within their legal rights to sue you for the $3,000. Without the affirmation agreement, the discharge in Chapter 7 bankruptcy would absolve you of your personal liability on the unsecured portion of the debt.
So why sign a reaffirmation agreement on your auto loan? The simple answer is that in California, the lender can be allowed to repossess your vehicle if you refuse to sign a Reaffirmation Agreement. So, if you want your car, you you might be required to execute a reaffirmation agreement with respect to the debt as part of your Chapter 7 bankruptcy. However, not all vehicle lenders require debtors to sign a reaffirmation – most lenders would rather have your money than take your car back. Also, not all reaffirmation agreements are approved by the bankruptcy court; the judge may find that the reaffirmation agreement will impose an “undue hardship” on you. In that case you maybe allowed to retain the vehicle and continue to make the payments without a reaffirmation agreement. If you subsequently lose your ability to pay for the car, and the car is repossessed, or if you voluntarily surrendered the car, then the lender will be prevented from suing you for any balance owed after they auction off the car.