A Chapter 7 Bankruptcy allows a consumer to discharge their most, if not all, of their unsecured debt. Secured debt, such as a home mortgage or auto loan, is treated altogether differently. In regard to secured debt, the Chapter 7 Bankruptcy filer typically (1) surrenders the collateral; or (2) reaffirms the secured debt. Surrendering the asset (typically the car or home) or reaffirming the secured debt is the most common Chapter 7 Bankruptcy tactic.
The Chapter 7 Bankruptcy Petition includes a "Statement of Intentions." This Statement informs the secured creditors which of the above two options a Chapter 7 Bankruptcy filer has chosen for a particular debt. Stating an "intent" to reaffirm does not reaffirm the secured debt. A Reaffirmation Agreement must be prepared stating the balance, monthly payment, interest rate, and description of the collateral. Once the Reaffirmation Agreement is signed by all parties it is filed with the Court. Unless different terms have been negotiated, the original loan terms remain the same. A Reaffirmation Agreement is not binding on the parties until it has been signed by the Court and filed.
There are key differences between a Chapter 7 Bankruptcy with a Reaffirmation Agreement and a Chapter 7 Bankruptcy without such an agreement.
If a Reaffirmation Agreement is not filed:
Once a Chapter 7 Bankruptcy Discharge is entered in your case, you are no longer personally responsible to the creditor for the debt. However, in the absence of a Chapter 7 Bankruptcy Reaffirmation Agreement, the Creditor retains its lien against the property and retains the ability to repossess or foreclose on the property securing the debt. If the creditor sells the secured property and that sale price is less than what you owed you are not responsible for that deficiency. Your Chapter 7 Bankruptcy Discharge relieves you from the obligation of having to personally pay that creditor. The creditor is permanently prohibited from attempting to collect the difference from the Chapter 7 Bankruptcy filer.
If a Reaffirmation Agreement is filed:
A Chapter 7 Bankruptcy Reaffirmation Agreement reaffirms the Chapter 7 Bankruptcy filer's responsibility on the debt and reaffirms the creditor's security interest in the subject property. A Reaffirmation Agreement is a contract between the Chapter 7 Bankruptcy filer and the creditor. By signing the reaffirmation agreement, the Chapter 7 Bankruptcy filer waives the Chapter 7 Bankruptcy discharge with respect to a particular debt. A Reaffirmation Agreement restores the debtor's personal liability on the debt. Additionally, the Chapter 7 Bankruptcy filer that signs a Chapter 7 Bankruptcy must continue making the monthly payments and will remain personally liable on the reaffirmed debt if they fail to make the required payments. The reaffirmed debt will be completely unaffected by the bankruptcy filing as if the bankruptcy had occurred. Additionally, the creditor retains all of its rights to repossess or foreclose on the property securing the debt. In the event that the Chapter 7 Bankruptcy filer fails to make the required payments after signing a Reaffirmation Agreement, the creditor can repossess or foreclose the subject property and holder the Chapter 7 Bankruptcy filer personally responsible for any deficiency.
Why should you consider signing a Chapter 7 Bankruptcy Reaffirmation Agreement:
It may appear from the above discussion that you should not sign a Reaffirmation Agreement. However, if after careful consideration, you determine you can afford to continue making the monthly payment on the secured debt then you should consider signing the Reaffirmation Agreement. The primary reason to do so is to ensure that your timely payments are reported to the credit reporting agencies. Many secured creditors fail to report timely payments if a Reaffirmation Agreement is not filed with the Court. Likewise, many creditors will refuse to send billing statements or allow online payments in the absence of a Chapter 7 Bankruptcy.