I am sure you will not be surprised to see that the answer to this—as is true with most legal questions—is that it depends. As a bankruptcy practitioner I have mixed feelings about whether or not to recommend that my clients reaffirm a secured loan on a vehicle or a mortgage on a house. I often explain my opinion about the pros and cons and tell my clients that it is ultimately their decision whether to reaffirm or not, as it is they who will live with the consequences well beyond the bankruptcy. At least they can make that decision armed with some knowledge. So, this post is a sincere effort to lay out the pros and cons of the, “do I reaffirm or not” question.
Reaffirmation: What Art Thou?
In filing a Chapter 7 Bankruptcy you will be required to list all of your creditors whether they are Secured, Priority, Unsecured or Unsecured but Non-dischargeable. What most debtors fail to understand is that the default treatment of all the debts in the Secured or Unsecured categories is that the debts are discharged in the bankruptcy. Debtors actually have to take extra steps in order to keep certain debts from being discharged. These extra steps are known as reaffirmation.
Why is it Even a Question?
There are many reasons why someone might choose to reaffirm an otherwise dischargeable debt. Most commonly, people wish to reaffirm their mortgage for their home. These are the reaffirmations that I am most comfortable participating in as a bankruptcy practitioner. Regardless of their financial situation, everyone needs a place to live. Sometimes a mortgage payment can be more affordable than a rental payment on the same size house. Obviously, there might be other mortgage situations in which the debtors find themselves that represent the converse—that the mortgage is way more than they need or want and they could do better by downsizing by renting.
Reaffirmation situations that make me a little more nervous are those for automobiles, furniture, etc. These reaffirmations are far more tenuous than a housing situation and it is a lot easier to argue that the debtors would be better off surrendering the property and allowing the discharge to take its effect. There are lots of different alternatives to reaffirming the debt on a vehicle or furniture or appliance. Sometimes going without can be a better option.
You Knew What I Was When you Picked Me Up
So what does a debtor need to know about reaffirmation to be able to make an informed decision? First, reaffirmation does not happen automatically. One of the biggest pitfalls that debtors fall into is the mistaken belief that simply telling their attorney that they want to reaffirm and listing it on their Statement of Intentions in their bankruptcy makes it happen. Not so. There needs to be a Reaffirmation Agreement drafted, signed, and filed. In my practice, I explain to my clients that this is for them to request of their creditor and for their creditor to supply and ultimately file. I will sign a reaffirmation agreement and, sometimes file one, but, if the creditor is not going to play ball, I am not going to waste my time. As a debtor’s attorney I cannot force the creditor to sign a voluntary Reaffirmation Agreement and I cannot file one without their signature.
Second, it is important to know the effect of the reaffirmation agreement. Underlying any debt are two types of liability obligations of the debtor. These are called In Rem and In Personam liability. Simply put, these are the ability for the secured party to repossess the asset (In Rem) and the ability for the secured party to go after the debtor personally for the balance owed after they get the property back and sell it (In Personam). The discharge in a bankruptcy eliminates a debtor’s In Personam liability but does not eliminate the In Rem liability. That is why, in a bankruptcy, a debtor is able to surrender a vehicle and not have any further obligation to the creditor. By filing Reaffirmation Agreements, debtors put themselves back on the hook for the In Personam liability. This means that, should something come up in the future and you default on the reaffirmed debt, the secured creditor can first repossess the property, sell it and then come after you for the balance. It is as if you never filed bankruptcy to begin with as to that debt. This is why practitioners are so leery of participating in Reaffirmation Agreements.