Reaffirmations - Secured Debt

- Written by Lindsey Gardner, Law Clerk, Heartland Bankruptcy

A secured debt consists of debt backed by collateral, for instance a home mortgage is backed by the home itself and a car payment is backed by the car. Debtors may choose to keep their secured property by use of a redemption or a reaffirmation agreement. Redemptions allow debtors to redeem the property by purchasing it from the creditor with a lump sum payment. Reaffirmations allow debtors to ‘redo’ the agreement with the creditor. The Federal Bankruptcy “Code permits reaffirmations of unsecured as well as secured debt.” In Re Kinion, 207 F.3d 751 (5th Cir. 2000).

The new agreement can have the same terms as the old one or set forth a new amount owed and terms of repayment, allowing possibly for better terms to be negotiated. As long as the terms of the new agreement are kept current, the debtor can keep the property. This is especially helpful when the property being reaffirmed is an essential item, such as a car as the only means of transportation. Under reaffirmation agreements the creditor must include certain disclosures about the reaffirmation. 11 U.S.C § 524(c).

As long as an attorney represents the debtor and the debtor's budget shows they can afford the payments, upon signing the agreement it becomes effective immediately. If the debtor is not represented by an attorney, he/she must file the agreement with the court, appear at a court hearing, and get the approval of the bankruptcy judge. Nothing in the Bankruptcy Code stops the debtor from voluntarily repaying any debt; however case law suggests that not reaffirming on property such as a vehicle may be grounds for repossession in some states, including Missouri. In addition, if the debtor reaffirms the debt and subsequently defaults on the payments, the debtor then becomes responsible for the debt as though he/she never filed bankruptcy. Be sure to read all agreements carefully and that the debtor can afford to make any payments agreed to.

Bankruptcy Myth: I can't file at all

The bankruptcy reform of 2005 did change a lot of things about bankruptcy, but it did not eliminate your ability to file bankruptcy at all. There are now income guidelines, known as the "median income" and if your household falls above the median income, you still may qualify for Chapter 7 bankruptcy. Your attorney will use the "means test" to calculate your income minus allowable expenses, to determine whether by IRS standards you have disposable monthly income each month. If you do not, you pass the means test and can file Chapter 7. If you do not pass, you still have the option of filing a Chapter 13 bankruptcy to repay a portion of your debt (anywhere from 1%-100% repayment based on how much disposable income you have). Get the facts before ruling it out - go ahead and schedule that first consultation with your bankruptcy lawyer and see where you stand.