What is a Reaffirmation Agreement?

Most people file a Chapter 7 bankruptcy to get rid of their debts. However, even if a debt can be discharged, you may have special reasons why you want to promise to pay it. See The Bankruptcy Information Sheet produced by the United States Department of Justice U.S. Trustee Program. The most common reason is because the debt is secured by some sort of collateral (like a car) and you may be behind on your payments. For example, in order to keep your car, you may be required to file a reaffirmation agreement with the bankruptcy court. A reaffirmation agreement can be thought of as a new contract between you and your creditor that takes the debt outside of your bankruptcy. Reaffirmations agreements are not required by bankruptcy law or by any other law.  Reaffirmation agreements:

  1. must be voluntary;
  2. must not place too heavy a burden on you or your family;
  3. must be in your best interest; and
  4. can be canceled any time before the court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time.

If you are an individual and you are not represented by an attorney, the court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the court approves it.

It is very important to understand that if you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. This includes possibly facing repossession and a deficiency judgment.

But Happens if I am Current on my Payments?

A common misconception is that you will be required to enter into a reaffirmation agreement when you are current on your payments. This misconception is likely based on a “default” provision in your purchase agreement, which may state that the mere act of filing bankruptcy is considered to be a default. This scenario was addressed by a Nevada Bankruptcy Court in 2013 in a case known as In re Henderson. bam-12-23954-henderson-kennedy-green-perez-greene
In In re Henderson, the bankruptcy judge recognized that there is a common factual scenario: debtors who wish to reaffirm a car loan that exceeds the value of the car that serves as collateral. The debtors each wish to reaffirm the loan because a car is, among other things, essential to keeping their employment. Even though all debtors are current on their payments, they fear repossession because their purchase contracts make a bankruptcy filing an event of default that allows repossession. Controlling Nevada law, however, has recently changed to preclude repossession unless the default significantly impairs the prospect of payment, performance, or realization of the lender’s collateral. The question thus resolves itself into whether the simple act of filing bankruptcy, without more, constitutes such an impairment. This court says no.  See In re Henderson, 492 B.R. at 539. The Court ultimately did not approve the reaffirmation agreements and concluded that so long as the debtors maintain their payments and do not endanger the collateral, they can maintain possession and use of their vehicles. In short, there is no upside for the debtors in the reaffirmation agreements. There is only the downside of excluding unsecured debt from discharge. See In re Henderson, 492 B.R. at 545.

Since 2003, the Las Vegas bankruptcy attorneys of Luh & Associates has been helping Nevadans navigate the bankruptcy process. Please contact the Las Vegas bankruptcy attorneys at Luh & Associates if you have any additional questions or concerns. We look forward to answering your questions!