Debtors have three options with respect to collateral in chapter 7 bankruptcy. Debtors can surrender the collateral back to the creditor without further obligation, redeem the collateral by paying the creditor the market value of the asset, or keep the collateral by agreeing to continue making payments by way of a reaffirmation.
A reaffirmation agreement is a new promise to continue making the payments, thereby allowing the debtor to retain the collateral. This agreement is entered into post-bankruptcy, which means the debtors are renewing their obligation to make payments. Failure to continue making timely payments as set forth in the reaffirmation agreement and the creditor can repossess the collateral and possibly sue the debtor for any deficiency owed.
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In order to be approved by the court, a reaffirmation agreement must (1) be in the best interest of the debtor and (2) not pose an undue hardship on the debtor. If the debtor has an attorney, the attorney may sign the reaffirmation certifying the agreement is in the best interest of the debtor and does not pose any undue hardship, and no further hearing is required.
If the debtor is unrepresented, or if debtor's attorney will not certify the agreement, a hearing will be required and the presiding bankruptcy judge will review the reaffirmation agreement to determine its acceptability.
Much deliberation should be exercised prior to reaffirming a debt. In cases where the balance owed to the creditor is much greater than the value of the collateral, or when the interest rate on the loan is on the high side, surrendering the collateral may be the right choice. If the debtor is represented by a bankruptcy attorney the attorney should attempt to negotiate with the creditor to secure more favorable terms on the loan.
Before deciding whether to sign a reaffirmation debtors should discuss the matter with an experienced Gainesville bankruptcy lawyer.
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