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Everything you Need to Know About Reaffirmation Agreements.

In a nutshell, a reaffirmation agreement is an agreement between the debtor and one of its pre-petition creditors that, if enforceable, provides an otherwise dischargeable debt will not be discharged because of such agreement. A reaffirmation agreement operates as a post-petition waiver of a debtor’s discharge as to the debt covered by the reaffirmation agreement.

How Do Reaffirmation Issues Come Up?

Absent a reaffirmation agreement, a secured creditor with a lien against a vehicle has a claim against the debtor personally and a claim attaching to the vehicle (i.e., the lien). The lien passes through bankruptcy notwithstanding entry of discharge in favor of the debtor. Therefore, if the debtor fails to make payments after a discharge, the lender may repossess the vehicle but is barred by the discharge from collecting the deficiency balance against the debtor. Because of this, car lenders will want to force the debtor to reaffirm if they can.

Does the “Ride Through" Option Still Exist as an Alternative to Reaffirmation?

Most security agreements contain an “ipso facto” clause that provides the creditor can declare the debtor in default of the agreement by the mere act of filing bankruptcy. Section 521(d) provides that nothing in the Bankruptcy Code prevents a creditor from enforcing its ipso facto clause if the debtor does not timely surrender, redeem or reaffirm secured debt as reflected in the debtor’s statement of intention that must be filed with the bankruptcy petition. And, if that occurs, the automatic stay terminates by operation of law.

Therefore, even if the debtor is current on its payments, if the debtor does not timely reaffirm a debt at the request of the secured creditor, the automatic stay will terminate, and creditor can repossess the car pursuant to the ipso facto clause. See e.g., In re Caraballo, 386 B.R. 398 (Bankr. D. Conn. 2008); but see also Coastal Federal Credit Union v. Hardiman, 398 (B.R. 161 (E.D.N.C. 2008 (modified version of “ride through” permitted where debtors signed reaffirmation agreement and sought court approval that was subsequently denied.).

Before BAPCPA, debtors could pursue the judicially crafted “ride through” or “retain and pay” option by declining to reaffirm and simply retain the car without fear of repossession by making regular monthly payments.

Why Might a Debtor Want to Sign One?

A debtor may have several reasons for signing a reaffirmation agreement. Two of the most common are: (1) the debtor believes she can rebuild post-bankruptcy credit by paying off the reaffirmed debt in full; and (2) the creditor requested the debtor sign one and the debtor feels it has no other choice but to do so because the car is necessary to get to/from work.

Does Paying Off Reaffirmed Debt Help Rebuild the Debtor’s Credit Score?

We explored this question in a prior post. According to a seemingly highly qualified expert called by Wells Fargo to discuss this precision issue, the answer is “no”. In re Anzaldo, 612 B.R. 205 (Bankr. S.D. Cal. 2020).

What’s the Procedure for Enforceability of a Reaffirmation Agreement?

Reaffirmation agreements require the following to be enforceable:

  • The debtor must timely signal its intention to reaffirm (30 days within first date set for 341 meeting of creditors; 45 days for purchase money security agreements);

  • Reaffirmed agreements must be filed within 60 days of the first date set for the 341 meeting;

  • If the debtor was represented by counsel, then an affidavit of debtor’s counsel must be filed with the reaffirmation agreement setting forth that 1) agreement is voluntary; 2) the attorney advised the debtor the agreement allows the creditor to come after the debtor for a deficiency balance if the debtor defaults; 3) if the debtor is unrepresented, then the bankruptcy court must approve the agreements following a hearing.

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