What is a Reaffirmation Agreement?
A reaffirmation agreement is a new contract between an individual filing for bankruptcy and a creditor. The contract will reaffirm the debt owed to the creditor, which means the debt will not be discharged in bankruptcy. Essentially, the individual is promising to continue making payments on the debt even though they filed for bankruptcy.
What Type of Debt is Reaffirmed?
Reaffirmation agreements are always linked to “secured” debt. A secured debt is typically a car loan or mortgage. These debts are secured to an asset. In the event the debtor defaults on payments, the lender may repossess the vehicle or foreclose on the home. This allows the lender to recoup some of the money invested in the loan.
For example, Suzy purchased a 2014 Honda Civic with a car loan from Travis Credit Union. Suzy unfortunately misses a couple of payments. The loan with Travis Credit Union is secured by the Honda Civic. Because Suzy missed payments on the loan, Travis Credit Union has the right to repossess the Honda Civic.
Who Should Consider Signing a Reaffirmation Agreement?
Individuals who have secured debts, such as a car loan or mortgage, may want to consider signing a reaffirmation agreement.
Why Should Someone Sign a Reaffirmation Agreement?
A reaffirmation agreement can provide comfort to individuals because there is a valid “contract” that will prevent any foreclosure or repossession so long as the individual doesn’t default. If there is a large amount of equity in the asset, individuals may sleep better knowing there is a signed agreement on file
Credit Reporting on Reaffirmed Debt
Individuals who do not sign reaffirmation agreements may be upset after completing the bankruptcy. Its unlikely that a creditor will repossess a vehicle or foreclose on a home in the event an agreement is not signed. However, its very likely that creditors will not report timely payments on the debt to the credit bureaus. The creditor believes the debt does not exist because it was discharged. Payments on a non-existent debt don’t need to be reported. The lack of reporting can hurt the positive growth on the credit score for timely payments post-bankruptcy. Therefore, signing a reaffirmation agreement will ensure the creditor continues to report timely payments to the credit bureaus and this helps the credit score.
Challenges Signing a Reaffirmation Agreement in Bankruptcy
An individual filing for bankruptcy in Sacramento may decide to sign a reaffirmation agreement after considering all of their options. However, a reaffirmation agreement is not automatically approved and filed with the bankruptcy court.
Presumption of Undue Hardship
The bankruptcy petition includes income and expenses schedules. The income schedule outlines the gross wages and calculates the net monthly income after deductions. The expenses schedule outlines all reasonable and necessary monthly household expenses. If the monthly expenses exceed the net income, there is a “presumption of undue hardship.”
When the presumption of undue hardship exists, the individual may not sign and file a reaffirmation agreement without the bankruptcy court’s approval. The individual filing for bankruptcy will need to attend a hearing to request permission from the court to sign the reaffirmation agreement. The person will need to prove they can afford the payments.
Not all creditors are considered equal. Credit Unions apparently have great lobbyists. If a presumption of undue hardship exists, but the creditor is a credit union, the individual filing for bankruptcy is not required to attend a hearing to request permission from the court.
Creditor Fails to File Reaffirmation Agreement with the Bankruptcy Court
Another problem is that creditors are the parties who prepare the reaffirmation agreements. The person filing bankruptcy states their desire to sign a reaffirmation agreement, but it is the creditor that must prepare it. The creditor will prepare the reaffirmation agreement and send it to the bankruptcy filer. After reviewing the agreement, the individual filing for bankruptcy will send the signed agreement back to the creditor. The creditor then must sign and file it with the bankruptcy court in Sacramento. Therefore, the creditor is involved at two different stages after the bankruptcy is filed. First, the creditor must complete the reaffirmation agreement and send it the person filing bankruptcy. Second, the creditor must sign and file the reaffirmation agreement with the court after receiving a signed copy back from the person who filed bankruptcy.
Hence, a court approved reaffirmation agreement is not guaranteed.
Negative Ramifications of Signing a Reaffirmation Agreement
As mentioned, signing a reaffirmation agreement is essentially a promise to continue paying the debt. Defaulting on the payment of a secured loan without filing bankruptcy will likely result in foreclosure of the home or repossession of the vehicle. Defaulting on the payment after filing bankruptcy and having signed a reaffirmation agreement can result in the same situation, which is foreclosure or repossession.
In the example above, Suzy’s Honda Civic was repossessed by Travis Credit Union because she missed a few payments. Upon repossession, the Honda will be sold at auction. Its rare that vehicles sell for a higher amount at auction than the remaining balance on the loan. Hence, Suzy will likely be personally liable for the difference between the auction sale price and the remaining balance on the car loan from Travis Credit Union. This is the situation if (1) Suzy did not file bankruptcy or (2) if Suzy did file bankruptcy and signed a reaffirmation agreement on the secured debt.
Benefits of Not Signing a Reaffirmation Agreement
Not signing a reaffirmation agreement in bankruptcy means the debt will be discharged. The lender may move for repossession of the vehicle with permission from the court. If the individual who filed bankruptcy continues to make timely payments on the asset, its very unlikely that the creditor will take any action against the asset. Upon paying the full loan balance, the individual will still receive title even though they did not sign a reaffirmation agreement.
In the example above, Suzy filed for bankruptcy in Sacramento and did not sign a reaffirmation agreement for the Honda Civic. After the bankruptcy process was finished and Suzy received a discharge, Suzy missed a few payments on the Honda. The Honda was then repossessed by Travis Credit Union and sold at auction. Its rare that vehicles sell for a higher amount at auction than the remaining balance on the loan. However, because Suzy did not sign a reaffirmation agreement, Suzy will not be personally liable for any difference between the auction sale price and the remaining balance on the car loan from Travis Credit Union.
Contact Our Sacramento Bankruptcy Attorney
There are several factors to consider before signing a reaffirmation agreement. Reaffirmation agreements are not always accurate. Our Sacramento bankruptcy attorneys have witnessed several creditors attempt to increase the balance of the debt or interest rate in reaffirmation agreements. We recommend that anyone considering a reaffirmation agreement speak with a top qualified bankruptcy attorney in their area before signing anything.
Contact Sacramento bankruptcy attorneys to set up a free initial meeting. Our attorneys walk clients through the bankruptcy entire process.
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By: Trevor Carson Google+
*The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact an attorney for a consultation. This post is considered a solicitation and advertisement. The post does not warrant the outcome of any matter. Sacramento Bankruptcy Attorney on the reaffirmation agreements in bankruptcy.
Sacramento Bankruptcy Resources
United States Bankruptcy Courts – Bankruptcies are filed in federal courts. Here is a link to the federal courts website for bankruptcies.
United States Bankruptcy Court, Eastern District – A link to the bankruptcy court in Sacramento.
11 U.S. Code § 524 – Effect of discharge
(a) A discharge in a case under this title—
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; and
(3) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect or recover from, or offset against, property of the debtor of the kind specified in section 541(a)(2) of this title that is acquired after the commencement of the case, on account of any allowable community claim, except a community claim that is excepted from discharge under section 523, 1228(a)(1), or 1328(a)(1), or that would be so excepted, determined in accordance with the provisions of sections 523(c) and 523(d) of this title, in a case concerning the debtor’s spouse commenced on the date of the filing of the petition in the case concerning the debtor, whether or not discharge of the debt based on such community claim is waived.
(b) Subsection (a)(3) of this section does not apply if—
(A) the debtor’s spouse is a debtor in a case under this title, or a bankrupt or a debtor in a case under the Bankruptcy Act, commenced within six years of the date of the filing of the petition in the case concerning the debtor; and
(B) the court does not grant the debtor’s spouse a discharge in such case concerning the debtor’s spouse; or
(A) the court would not grant the debtor’s spouse a discharge in a case under chapter 7 of this title concerning such spouse commenced on the date of the filing of the petition in the case concerning the debtor; and
(B) a determination that the court would not so grant such discharge is made by the bankruptcy court within the time and in the manner provided for a determination under section 727 of this title of whether a debtor is granted a discharge.
(c) An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if—
(1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title;
(2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement;
(3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that—
(A) such agreement represents a fully informed and voluntary agreement by the debtor;
(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal effect and consequences of—
(i) an agreement of the kind specified in this subsection; and
(ii) any default under such an agreement;
(4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim;
(5) the provisions of subsection (d) of this section have been complied with; and
(A) in a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as—
(i) not imposing an undue hardship on the debtor or a dependent of the debtor; and
(ii) in the best interest of the debtor.
(B) Subparagraph (A) shall not apply to the extent that such debt is a consumer debt secured by real property.
(d) In a case concerning an individual, when the court has determined whether to grant or not to grant a discharge under section 727, 1141, 1228, or 1328 of this title, the court may hold a hearing at which the debtor shall appear in person. At any such hearing, the court shall inform the debtor that a discharge has been granted or the reason why a discharge has not been granted. If a discharge has been granted and if the debtor desires to make an agreement of the kind specified in subsection (c) of this section and was not represented by an attorney during the course of negotiating such agreement, then the court shall hold a hearing at which the debtor shall appear in person and at such hearing the court shall—
(1) inform the debtor—
(A) that such an agreement is not required under this title, under nonbankruptcy law, or under any agreement not made in accordance with the provisions of subsection (c) of this section; and
(B) of the legal effect and consequences of—
(i) an agreement of the kind specified in subsection (c) of this section; and
(ii) a default under such an agreement; and
(2) determine whether the agreement that the debtor desires to make complies with the requirements of subsection (c)(6) of this section, if the consideration for such agreement is based in whole or in part on a consumer debt that is not secured by real property of the debtor.
(e) Except as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.
(f) Nothing contained in subsection (c) or (d) of this section prevents a debtor from voluntarily repaying any debt.
(A) After notice and hearing, a court that enters an order confirming a plan of reorganization under chapter 11 may issue, in connection with such order, an injunction in accordance with this subsection to supplement the injunctive effect of a discharge under this section.
(B) An injunction may be issued under subparagraph (A) to enjoin entities from taking legal action for the purpose of directly or indirectly collecting, recovering, or receiving payment or recovery with respect to any claim or demand that, under a plan of reorganization, is to be paid in whole or in part by a trust described in paragraph (2)(B)(i), except such legal actions as are expressly allowed by the injunction, the confirmation order, or the plan of reorganization.
(A) Subject to subsection (h), if the requirements of subparagraph (B) are met at the time an injunction described in paragraph (1) is entered, then after entry of such injunction, any proceeding that involves the validity, application, construction, or modification of such injunction, or of this subsection with respect to such injunction, may be commenced only in the district court in which such injunction was entered, and such court shall have exclusive jurisdiction over any such proceeding without regard to the amount in controversy.
(B) The requirements of this subparagraph are that—
(i) the injunction is to be implemented in connection with a trust that, pursuant to the plan of reorganization—
(I) is to assume the liabilities of a debtor which at the time of entry of the order for relief has been named as a defendant in personal injury, wrongful death, or property-damage actions seeking recovery for damages allegedly caused by the presence of, or exposure to, asbestos or asbestos-containing products;
(II) is to be funded in whole or in part by the securities of 1 or more debtors involved in such plan and by the obligation of such debtor or debtors to make future payments, including dividends;
(III) is to own, or by the exercise of rights granted under such plan would be entitled to own if specified contingencies occur, a majority of the voting shares of—
(aa) each such debtor;
(bb) the parent corporation of each such debtor; or
(cc) a subsidiary of each such debtor that is also a debtor; and
(IV) is to use its assets or income to pay claims and demands; and
(ii) subject to subsection (h), the court determines that—
(I) the debtor is likely to be subject to substantial future demands for payment arising out of the same or similar conduct or events that gave rise to the claims that are addressed by the injunction;
(II) the actual amounts, numbers, and timing of such future demands cannot be determined;
(III) pursuit of such demands outside the procedures prescribed by such plan is likely to threaten the plan’s purpose to deal equitably with claims and future demands;
(IV) as part of the process of seeking confirmation of such plan—
(aa) the terms of the injunction proposed to be issued under paragraph (1)(A), including any provisions barring actions against third parties pursuant to paragraph (4)(A), are set out in such plan and in any disclosure statement supporting the plan; and
(bb) a separate class or classes of the claimants whose claims are to be addressed by a trust described in clause (i) is established and votes, by at least 75 percent of those voting, in favor of the plan; and
(V) subject to subsection (h), pursuant to court orders or otherwise, the trust will operate through mechanisms such as structured, periodic, or supplemental payments, pro rata distributions, matrices, or periodic review of estimates of the numbers and values of present claims and future demands, or other comparable mechanisms, that provide reasonable assurance that the trust will value, and be in a financial position to pay, present claims and future demands that involve similar claims in substantially the same manner.
(A) If the requirements of paragraph (2)(B) are met and the order confirming the plan of reorganization was issued or affirmed by the district court that has jurisdiction over the reorganization case, then after the time for appeal of the order that issues or affirms the plan—
(i) the injunction shall be valid and enforceable and may not be revoked or modified by any court except through appeal in accordance with paragraph (6);
(ii) no entity that pursuant to such plan or thereafter becomes a direct or indirect transferee of, or successor to any assets of, a debtor or trust that is the subject of the injunction shall be liable with respect to any claim or demand made against such entity by reason of its becoming such a transferee or successor; and
(iii) no entity that pursuant to such plan or thereafter makes a loan to such a debtor or trust or to such a successor or transferee shall, by reason of making the loan, be liable with respect to any claim or demand made against such entity, nor shall any pledge of assets made in connection with such a loan be upset or impaired for that reason;
(B) Subparagraph (A) shall not be construed to—
(i) imply that an entity described in subparagraph (A)(ii) or (iii) would, if this paragraph were not applicable, necessarily be liable to any entity by reason of any of the acts described in subparagraph (A);
(ii) relieve any such entity of the duty to comply with, or of liability under, any Federal or State law regarding the making of a fraudulent conveyance in a transaction described in subparagraph (A)(ii) or (iii); or
(iii) relieve a debtor of the debtor’s obligation to comply with the terms of the plan of reorganization, or affect the power of the court to exercise its authority under sections 1141 and 1142 to compel the debtor to do so.
(i) Subject to subparagraph (B), an injunction described in paragraph (1) shall be valid and enforceable against all entities that it addresses.
(ii) Notwithstanding the provisions of section 524(e), such an injunction may bar any action directed against a third party who is identifiable from the terms of such injunction (by name or as part of an identifiable group) and is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor to the extent such alleged liability of such third party arises by reason of—
(I) the third party’s ownership of a financial interest in the debtor, a past or present affiliate of the debtor, or a predecessor in interest of the debtor;
(II) the third party’s involvement in the management of the debtor or a predecessor in interest of the debtor, or service as an officer, director or employee of the debtor or a related party;
(III) the third party’s provision of insurance to the debtor or a related party; or
(IV) the third party’s involvement in a transaction changing the corporate structure, or in a loan or other financial transaction affecting the financial condition, of the debtor or a related party, including but not limited to—
(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or
(bb) acquiring or selling a financial interest in an entity as part of such a transaction.
(iii) As used in this subparagraph, the term “related party” means—
(I) a past or present affiliate of the debtor;
(II) a predecessor in interest of the debtor; or
(III) any entity that owned a financial interest in—
(aa) the debtor;
(bb) a past or present affiliate of the debtor; or
(cc) a predecessor in interest of the debtor.
(B) Subject to subsection (h), if, under a plan of reorganization, a kind of demand described in such plan is to be paid in whole or in part by a trust described in paragraph (2)(B)(i) in connection with which an injunction described in paragraph (1) is to be implemented, then such injunction shall be valid and enforceable with respect to a demand of such kind made, after such plan is confirmed, against the debtor or debtors involved, or against a third party described in subparagraph (A)(ii), if—
(i) as part of the proceedings leading to issuance of such injunction, the court appoints a legal representative for the purpose of protecting the rights of persons that might subsequently assert demands of such kind, and
(ii) the court determines, before entering the order confirming such plan, that identifying such debtor or debtors, or such third party (by name or as part of an identifiable group), in such injunction with respect to such demands for purposes of this subparagraph is fair and equitable with respect to the persons that might subsequently assert such demands, in light of the benefits provided, or to be provided, to such trust on behalf of such debtor or debtors or such third party.
(5) In this subsection, the term “demand” means a demand for payment, present or future, that—
(A) was not a claim during the proceedings leading to the confirmation of a plan of reorganization;
(B) arises out of the same or similar conduct or events that gave rise to the claims addressed by the injunction issued under paragraph (1); and
(C) pursuant to the plan, is to be paid by a trust described in paragraph (2)(B)(i).
(6) Paragraph (3)(A)(i) does not bar an action taken by or at the direction of an appellate court on appeal of an injunction issued under paragraph (1) or of the order of confirmation that relates to the injunction.
(7) This subsection does not affect the operation of section 1144 or the power of the district court to refer a proceeding under section 157 of title 28 or any reference of a proceeding made prior to the date of the enactment of this subsection.
(h)Application to Existing Injunctions.—For purposes of subsection (g)—
(1) subject to paragraph (2), if an injunction of the kind described in subsection (g)(1)(B) was issued before the date of the enactment of this Act, as part of a plan of reorganization confirmed by an order entered before such date, then the injunction shall be considered to meet the requirements of subsection (g)(2)(B) for purposes of subsection (g)(2)(A), and to satisfy subsection (g)(4)(A)(ii), if—
(A) the court determined at the time the plan was confirmed that the plan was fair and equitable in accordance with the requirements of section 1129(b);
(B) as part of the proceedings leading to issuance of such injunction and confirmation of such plan, the court had appointed a legal representative for the purpose of protecting the rights of persons that might subsequently assert demands described in subsection (g)(4)(B) with respect to such plan; and
(C) such legal representative did not object to confirmation of such plan or issuance of such injunction; and
(2) for purposes of paragraph (1), if a trust described in subsection (g)(2)(B)(i) is subject to a court order on the date of the enactment of this Act staying such trust from settling or paying further claims—
(A) the requirements of subsection (g)(2)(B)(ii)(V) shall not apply with respect to such trust until such stay is lifted or dissolved; and
(B) if such trust meets such requirements on the date such stay is lifted or dissolved, such trust shall be considered to have met such requirements continuously from the date of the enactment of this Act.
(i) The willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan (including crediting the amounts required under the plan), shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.
(j) Subsection (a)(2) does not operate as an injunction against an act by a creditor that is the holder of a secured claim, if—
(1) such creditor retains a security interest in real property that is the principal residence of the debtor;
(2) such act is in the ordinary course of business between the creditor and the debtor; and
(3) such act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.
(1) The disclosures required under subsection (c)(2) shall consist of the disclosure statement described in paragraph (3), completed as required in that paragraph, together with the agreement specified in subsection (c), statement, declaration, motion and order described, respectively, in paragraphs (4) through (8), and shall be the only disclosures required in connection with entering into such agreement.
(2) Disclosures made under paragraph (1) shall be made clearly and conspicuously and in writing. The terms “Amount Reaffirmed” and “Annual Percentage Rate” shall be disclosed more conspicuously than other terms, data or information provided in connection with this disclosure, except that the phrases “Before agreeing to reaffirm a debt, review these important disclosures” and “Summary of Reaffirmation Agreement” may be equally conspicuous. Disclosures may be made in a different order and may use terminology different from that set forth in paragraphs (2) through (8), except that the terms “Amount Reaffirmed” and “Annual Percentage Rate” must be used where indicated.
(3) The disclosure statement required under this paragraph shall consist of the following:
(A) The statement: “Part A: Before agreeing to reaffirm a debt, review these important disclosures:”;
(B) Under the heading “Summary of Reaffirmation Agreement”, the statement: “This Summary is made pursuant to the requirements of the Bankruptcy Code”;
(C) The “Amount Reaffirmed”, using that term, which shall be—
(i) the total amount of debt that the debtor agrees to reaffirm by entering into an agreement of the kind specified in subsection (c), and
(ii) the total of any fees and costs accrued as of the date of the disclosure statement, related to such total amount.
(D) In conjunction with the disclosure of the “Amount Reaffirmed”, the statements—
(i) “The amount of debt you have agreed to reaffirm”; and
(ii) “Your credit agreement may obligate you to pay additional amounts which may come due after the date of this disclosure. Consult your credit agreement.”.
(E) The “Annual Percentage Rate”, using that term, which shall be disclosed as—
(i) if, at the time the petition is filed, the debt is an extension of credit under an open end credit plan, as the terms “credit” and “open end credit plan” are defined in section 103 of the Truth in Lending Act, then—
(I) the annual percentage rate determined under paragraphs (5) and (6) of section 127(b) of the Truth in Lending Act, as applicable, as disclosed to the debtor in the most recent periodic statement prior to entering into an agreement of the kind specified in subsection (c) or, if no such periodic statement has been given to the debtor during the prior 6 months, the annual percentage rate as it would have been so disclosed at the time the disclosure statement is given to the debtor, or to the extent this annual percentage rate is not readily available or not applicable, then
(II) the simple interest rate applicable to the amount reaffirmed as of the date the disclosure statement is given to the debtor, or if different simple interest rates apply to different balances, the simple interest rate applicable to each such balance, identifying the amount of each such balance included in the amount reaffirmed, or
(III) if the entity making the disclosure elects, to disclose the annual percentage rate under subclause (I) and the simple interest rate under subclause (II); or
(ii) if, at the time the petition is filed, the debt is an extension of credit other than under an open end credit plan, as the terms “credit” and “open end credit plan” are defined in section 103 of the Truth in Lendin