19 Mar Chapter 7 Reaffirmation Only Available if You can Afford to Pay
The reaffirmation process in Chapter 7 is a useful and widely used tool for debtors to keep and continue to pay for houses, cars, furniture, electronics and co-signed debts. As I wrote in this blog back in February, 2008, reaffirmation will work in Chapter 7 if you have little or no equity in the collateral that secures the debt, if the creditor agrees to reaffirm and if the reaffirmation is in the debtor’s “best interest.”
As a debtor’s attorney I am especially concerned with this “best interest” issue of reaffirmation law. Under the current law, debtor’s attorneys must sign off on reaffirmation agreements and assert that we have read over the agreement, that we have reviewed the debtor’s budget and that in our opinion this reaffirmation is truly in the debtor’s best interest.
At a minimum, this means that the debtor’s budget must not be negative after payment of the reaffirmed debt. In other words, a debtor who clears $2,000 per month after taxes, spends $1,800 per month for housing, food, insurance, transportation and other essentials, cannot reaffirm a car loan that calls for a $350 per month payment.
If I signed off on a reaffirmation that left my client $150 negative each month, I would expect that an alert bankruptcy judge would not sign the reaffirmation and that he would set a court date to ask me to appear to explain how such an unbalanced reaffirmation was in my client’s best interest.
As the debtor you also need to take a hard look at the terms of any reaffirmation agreement you are thinking about signing. When you reaffirm a debt you are basically taking that debt out from the protection of bankruptcy and you are making it a permanent debt. I suggest to my clients that they take a long term view – yes it is easier to reaffirm and keep that 5 year old car for $350 per month. But will that reaffirmation seem like such a good idea in 2 years when the engine overheats and you are facing a $2,000 repair.
Bottom line: reaffirmation agreements can allow you to keep your house, car and furniture, while discharging credit card bills, medical debt and repossession deficiency claims. However, do not assume that reaffirmation is automatic or that it always makes sense. Make sure to thoroughly discuss reaffirmation with your attorney before signing anything.
Jonathan Ginsberg, Esq.
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