An Atlanta Bankruptcy Lawyer’s Primer on Reaffirmation Agreements
Before I let anyone enter into a reaffirmation agreement with a creditor, I make sure they know exactly what they are getting into and the full ramifications of signing such an agreement. A Reaffirmation Agreement is a voluntary, new agreement entered into between the debtor and a creditor providing that the debtor’s obligation to that particular creditor will survive the discharge. In simpler terms, signing a reaffirmation agreements means you are agreeing that you will remain personally liable to the creditor after your bankruptcy case is closed. Let’s take an example:
John is a hardworking Atlanta man looking to purchase a new car. John, confident in his negotiating abilities, swaggers into the dealer and offers $15,000.00 for a car that is clearly worth $18,0000.00. The southern charm must have worked, as John is now the proud owner 2009 Honda Civic. To finance the purchase, John borrows money from his local credit union, Atlanta Local Credit Union. One year later, John suffers a severe head injury that puts him in the hospital for 5 days. The medical bill is enough to purchase a decent little 3 bedroom home in Marietta or Decatur. To make matters worse, John’s employer was recently assessed by the I.R.S. for owing $500,000 in payroll taxes and had to shut the doors. John no longer has a job. As a result, John consults with an Atlanta bankruptcy attorney, who advises him that a Chapter 7 bankruptcy would be the solution to his problems. Here’s the only problem: John is a few months behind on car note and the credit union wants him to sign a reaffirmation agreement to keep the car. Otherwise, the credit union will file a Motion to Lift Stay and repossess the car. The good news is that John will have no liability for the remaining balance on the note after the lender sells the car. The bad news: John no longer has a car. In this situation, provided John picked up another job where he could at least afford his basic expenses, he could sign a reaffirmation agreement with the creditor to cure the past due amounts (the “arrearage”) and continue to make the regular monthly payments (or whatever new deal your attorney negotiates).
You see, in a Chapter 7 bankruptcy, you only have three options regarding the disposition of your secured property:
1. You can surrender the property to the lender. In Georgia, outside bankruptcy, the lender can repossess your car and sue you for the difference between what it brings at the auction house and what you owe on it. If you file Chapter 7, the lender’s only recourse is against the collateral, meaning that they cannot sue you for the deficiency.
2. You can redeem the vehicle. For personal property only, you have the option to pay the lender the entire amount due in full. On a car with an $17,000 balance, this is clearly not an option for John.
3. You can reaffirm the underlying debt. This is the option discussed above. The reality of bankruptcy in Atlanta is that even if you are current on your monthly payments, the lender can still repossess your vehicle since the terms of the loan have been significantly modified by the filing of your bankruptcy. The loan has been changed from a “recourse loan” to a “non-recourse loan”. What this means is that by filing bankruptcy, the lender no loner has any recourse against you personally if you fail to make payments. The lender’s only recovery options are to repossess the vehicle and see how much they can get at the auction house. Thus, if John wants to keep his vehicle, he must sign a reaffirmation agreement with Atlanta Local Credit Union, creating a new, post-discharge contract fully enforceable against John in his individual capacity.
In almost every Chapter 7 I file in which the debtor owns a vehicle, the lender will send over a reaffirmation agreement for our review. Once I receive that agreement, we will sit down together to review the terms of the agreement and if your current income can realistically support the monthly payment to the car lender. If you wish to keep the vehicle, you must sign the reaffirmation agreement. Not only that, but I must also sign the agreement as your bankruptcy attorney, stating my belief that this obligation will not impose an “undue hardship” on your finances. If I believe that you can make the requisite payments, I will file the reaffirmation agreement with the court to be approved by an Atlanta bankruptcy judge.
If the court requires a hearing, you and your attorney will attend the hearing, and the bankruptcy judge will ask you questions about your ability to make your monthly car payments pursuant to the reaffirmation agreement. Most judges will only hold a hearing if your expenses are higher than your income.
My Opinion On Reaffirmation Agreements
Avoid them if you can, sign them if you must, but whatever you do, be fully aware of the consequences of both actions. In my experience, if you are current on your monthly car payments, the lender will allow you to ride the note through bankruptcy without threatening or attempting to repossess your car. In other words, most lenders do not want to repossess the car if you are current on your monthly payments .