A “Reaffirmation Agreement” relates only to a Chapter 7 bankruptcy case. For more information about keeping property through bankruptcy, browse our sections about keeping real estate and personal property in Chapter 7 and keeping property in a Chapter 13 bankruptcy
Although a “Reaffirmation Agreement” relates to any and all collateral personal property, typically, in practice, the agreement relates to retaining only vehicles.
In short, The “Reaffirmation Agreement” is a contract with a finance company that reaffirms the debt with the finance company. The effect of the agreement is that the debt owed to the finance company is still owed to the creditor after the bankruptcy case is complete. If the finance company and the debtor enter into a Reaffirmation Agreement, that is approved by a judge, the debt to the financing company is not discharged (eliminated).
This means that after the debtor receives a discharge in connection with all other debt, the vehicle financing debt is still owed. This also means that in the event of any default in the future, the finance company may sue the debtor for the funds due on the loan, in addition to repossessing the automobile.
The bankruptcy code requires that specific terms and conditions are included in the “Reaffirmation Agreement”. Also, in most circumstances, the agreement must be approved the judge. A judge will approve the “Reaffirmation Agreement” if he believes that monthly finance payment is not an undue hardship. If the judge believes that the agreement’s monthly finance payment presents an undue hardship, the judge will not approve the agreement.
Generally, a judge’s determination of undue hardship is based on the debtor’s monthly available income to pay the monthly financing, after net income and expenses. Additionally, the judge will look to the necessity of the vehicle and whether the monthly payment is reasonable.
If the judge does not approve the “Reaffirmation Agreement”, she will typically include in the denial order that the debtor may continue to keep the car as long as the monthly payments are current.
Most finance companies will allow a debtor to keep the vehicle without signing the agreement and/or filing it with the court. Typically, under this scenario, the debtor may keep the car if the payments are current. If the payments are not current, at any future time, the finance company will repossess the auto. However, in this scenario, the finance company is not permitted to sue the debtor for the debt, as the debt was technically discharged and eliminated through bankruptcy.
At the time of writing this page, Ford Motor Credit Company will not allow a debtor to keep a vehicle, if he does not file a timely “Reaffirmation Agreement” with the court. However, Ford will allow a debtor to keep the car and make payments, even though the judge denies the agreement, if the agreement was timely filed with the court.
If the debtor does not file the agreement and the finance company allows him to keep the car by making timely payments, the finance company will not report the timely payments to the credit bureaus.
Due to creditor’s fraud and undue pressure with regard to enticing debtors to sign the agreement, the Bankruptcy Code includes specific terms and clauses that are required to be included in the “Reaffirmation Agreement”. In practice, all creditors use the same “Reaffirmation Agreement” form, which includes all the required information.
The following terms are required to be included in the “Reaffirmation Agreement”:
- the agreement represents a fully informed and voluntary agreement by the debtor;
- the agreement does not impose an undue hardship on the debtor;
- debtor’s attorney fully advised the debtor of the legal effect and consequences;
- debtor’s attorney may sign a certification indicating that the payment to the finance company is not an undue hardship.
For obvious reasons, debtor’s attorneys will most likely not swear that a debtor’s finance payment is not an undue hardship. Typically, in New Jersey, after the “Reaffirmation Agreement” certification is signed, it is filed with the Court and scheduled for a hearing. At the hearing, the debtor must appear before the judge and explain the need for the property and why the payment to the finance company is not an undue hardship. Presently, the judges are allowing debtors to participate at a hearing by telephone.
Contacting a Chapter 7 Bankruptcy Attorney
If you are considering filing for bankruptcy, you may need to take steps to prevent your vehicle from being repossessed. Contact experienced New Jersey bankruptcy attorney Robert Manchel, if you have any questions about your chapter 7 bankruptcy or Reaffirmation Agreement. Free consultations.