Reaffirmation agreements. Good (?), bad, very ugly.

The decision whether to sign a reaffirmation agreement is something you will need to think carefully about in consultation with your attorney.

It is a voluntary agreement, and you don’t have to sign it, but don’t think for a minute that you can put your head in the sand and avoid the decision.

First, what exactly is a reaffirmation agreement?
It is one of the three statutory “options” given to debtors who are:
1. in Chapter 7, and
2. who are trying to hang onto secured property. Reaffirmation agreements are not common in Chapter 13 bankruptcy. This is because debtors are most often coming current on their secured debts through their plan–no need to reaffirm debt that is hanging around by operation of the plan. Reaffirmation agreements most often apply to secured debts–like your car, TV, stereo, jewelry because the debtor is trying to hang on to the collateral after the debt has been discharged. [Why on earth would any debtor sign one for unsecured debt when there is no exchange of collateral for re-pledging of debt?] Notice I left your house of the list of things you might reaffirm, read on to find out why.

Options…. you got options.
Under the bankruptcy code, debtors are given 3 options. Debtors may reaffirm the debt, surrender the property, or redeem the property.
Reaffirmation of the debt means the debtor re-pledges that he or she owes the creditor the debt that otherwise would be discharged in bankruptcy. In exchange for re-pledging, the debtor is allowed to keep whatever collateral secures the debt. Sounds good, right? Read on.

Surrendering the property means the debtor gives back whatever collateral secured the debt that is to be discharged. Think of it as saying, “come and get it boys.” to whatever creditor holds an interest in the collateral. You may surrender your house, your car, your plasma TV, etc. And you will be discharged of any debt you carry on these items. Your attorney will counsel you about what exactly is involved if you intend to surrender, and you will notify creditors of your intent to surrender. Make sure you are within the allowable time to surrender the property.

Redeeming the property means that you satisfy the debt you carry on the secured property by making an offer to your creditor of some number between what the property is worth, what you owe, and also acceptable to the creditor. You will have to come up with the cash to back up your offer when you make the offer–but there are companies out there who will lend you money to pay off your redemption amount (Yes, you then owe that company money, and no it’s not discharged in your bankruptcy). This may be attractive to you if the property is something you can’t bear to part with and also something you can afford to bail out. Talk to your attorney before contacting a company that offers you redemption loans (sometimes called 722 loans). And talk to your attorney to figure out what an acceptable offer might be to your creditor. Make sure you are within the allowable time to redeem.

You also have a fourth option.
Ride-through, also known as “retain and pay.” This option is not part of the bankruptcy code, and may be specifically prohibited where you live. If you think you may go down this path you must talk to your attorney before deciding to venture.

Georgia state law offers minimal protection to debtors who enter this territory. It is imperative that you understand what rights and obligations you will have if you elect ride-through. That said, ride-through is an option exercised by many debtors in Georgia. (On a side note, be sure the attorney you hire understands the pitfalls and can advise you meaningfully about this option).

So, what’s the beef with reaffirmation?
Simply put. You sign that agreement and you are re-pledging that you will pay the debt you just had discharged by bankruptcy. Yes, you get the ‘thing,’ but you are putting yourself back on the hook your attorney just got you off of. And what’s wrong with that? Well, if something prevents you from making future payments on the ‘thing,’ your creditor will come get it, and then sue you for the ENTIRE amount of the debt you had at discharge. And they will be right, and you will have agreed to be on the hook, because this little bomb will have been in the reaffirmation agreement you signed. Talk to your attorney before you think about doing this—it’s serious. And know that you have 60 days from the date of your Meeting of the Creditors to sign the reaffirmation agreement. Once the 60 days has passed, or once your discharged, there can be no reaffirmation.

Why did I leave “house” off the list of debt that you can reaffirm? Because why on earth would you make this pledge on the biggest and costliest investment you family owns? That’s just too much to put depending on your future ability to pay.

Look for a future post to cover your attorney’s obligation to sign the reaffirmation agreement.