If you want to keep the collateral on a debt usually you have to exclude that debt from the legal write-off (“discharge”) of your debts that you receive in a Chapter 7 “straight bankruptcy” case. You exclude that debt from the discharge by signing a “reaffirmation agreement.” You remain legally liable on that debt. Through that document. most of the time you agree to all the terms of your original debt agreement. See this sample form reaffirmation agreement.
For example, you agree to pay the same monthly payment at the same interest rate as originally agreed. And you agree that if you don’t make the payments the creditor can repossess the collateral. And in most circumstances the creditor can then come after you for any remaining balance owed. (See our recent blog post about this risk of owing a “deficiency balance” after repossession.)
Conditions When Don’t Need Court Approval
After you sign a reaffirmation agreement it is filed at the bankruptcy court. Most of the time it then goes into effect without the need for court approval. So there’s no reaffirmation hearing.
The reaffirmation agreement does need court approval in two circumstances. If:
- you don’t have a bankruptcy lawyer representing you, or
- your lawyer does not sign the reaffirmation agreement
Why Would My Lawyer Not Sign the Reaffirmation Agreement?
By law your lawyer has the option of signing off on the reaffirmation agreement. To do so he or she would need to sign off on the following specific considerations:
(A) such [reaffirmation] 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 . . .
See Section 524(c)(3) of the U.S. Bankruptcy Code.
Subsections (A) and (C) would not likely be a problem for most lawyers. He or she would make sure you were “fully informed” and “fully advised” as indicated. Subsection (B) could sometimes be more challenging. Your budget may show that as much as you want or need the collateral (for example, a vehicle), you can‘t afford the loan payments and its other costs (insurance and maintenance, for a vehicle.) If so, the reaffirmation agreement appears to be “impose an undue hardship” on you and your family.
Usually you and Louisville bankruptcy lawyer can produce a budget that shows that you CAN afford to keep the collateral. But if not, your lawyer would understandably be reluctant to certify that the agreement did not impose an undue hardship. If he or she didn’t sign the reaffirmation agreement so certifying, you’d have to get court approval at a reaffirmation hearing.
The Reaffirmation Hearing Procedure
At the time scheduled for your reaffirmation hearing wait in the courtroom until the judge’s clerk calls your case. If you have a lawyer he or she will likely be there as well.
Approach the podium when the clerk calls your case. The judge will explain the purpose of the hearing. Then you’ll need to provide evidence showing that reaffirming the debt will not impose an undue hardship on you. You’ll need to show that you can make the payment while still being able to pay all your other necessary expenses.
You will also likely need to tell the judge that you understand “the legal effect and consequences of” the agreement. You will also specifically need to show you understand what happens if you default on the reaffirmation agreement. Particularly, the judge needs to be assured that you know that you will be liable on the debt in spite of filing bankruptcy.
If the judge is satisfied that you will not suffer an undue hardship, and that you understand what you are doing, she or he will approve the reaffirmation agreement. You’ll be able to keep the collateral as long as you abide by the agreement.
But if the judge is not satisfied, he or she will disapprove the agreement. At that point, if the creditor requires a binding reaffirmation agreement, it will be able to take back the collateral. That is not a result you want. So make sure you discuss all this with your lawyer early in the process to avoid this from happening.