Chicago Bankruptcy Lawyer David Siegel Explains Reaffirming A Debt In A Chapter 7 Bankruptcy Case

Chicago Bankruptcy Lawyer Explains

According to Chicago bankruptcy lawyer David Siegel, some property should be reaffirmed.  With secured property such as a vehicle, furniture, jewelry, electronics, those are secured items. Therefore, when you file a chapter 7 bankruptcy you have effectively eliminated the debt on those items if you want to give up the property.   So, if you are way upside down on a car and you filed a chapter 7, this is your chance to give the car back and owe nothing to the lender. However, most people want to keep their car or keep their electronics or furniture or jewelry; so they enter into a reaffirmation agreement.  The reaffirmation agreement effectively puts the debtor back on the hook for that item.  So the chapter 7 filing technically eliminates the obligation; the signing or execution of the reaffirmation agreement puts him back on the hook.

 Take Note

Here is where it’s really important.  If someone reaffirms on car and then six months down the road the car breaks down.  Then the vehicle can be taken, sold at auction and the debtor owes the deficiency amount.  This is because the debtor agreed to be back on the hook for that debt because they wanted to keep that item.  So what happens is once a chapter 7 is filed, the creditor is going to get notice of the bankruptcy.  A swift creditor is going to have the reaffirmation agreement already prepared by the time of the 341 meeting of creditors.  The majority of the document is going to be already filled out by the lender because the lender knows what the interest rate is, how much is owed, what the monthly payment is and what the specific information is pursuant to the collateral, VIN numbers and things like that.   So what we want to do is meet with our client either at the 341 meeting or after if we get the agreement after that and say to them, do you really want to reaffirm this debt?  This is your chance to get out of it.  Perhaps you want to keep your car, maybe you don’t.  And then they have to make a knowing election as to whether or not they want to reaffirm or not.  So if they reaffirm, they are going to be back on the hook.  Now there is time to rescind it.  There are some rules on when you can get out of it.

 Consumer Protection

Now, under the bankruptcy law, the recent amendment in 2005, there is a section called the consumer protection act portion.  I don’t see any consumer protection going on.  I think this all just to penalize the debtor.   But under this consumer protection side, the judges are going to look at these reaffirmation agreements to determine whether or not they impose an undue hardship upon the debtor.  If the debtor’s income and expenses are even, then there is no presumption of undue hardship.  However, if the debtor is any amount under, it could be a dollar or it could be $1000 in $2000 under per month, then there is a presumption of undue hardship that we have to rebut.  Most times, the judges will just allow the agreement to be approved.  However, in some cases, they are going to want to set a reaffirmation hearing.  This is a burdensome time because the debtor, instead of just appearing at the 341 meeting of creditors and being done, now they have to miss work again and appear before the court.  The debtor needs every day’s pay he can get.  Now he’s incurring additional expenses such as traveling, parking and all the rest to stand in front of a bankruptcy judge and explain how he can afford a vehicle when his budget is upside down.   Well obviously the money is coming from somewhere.  Somebody’s helping them or making some contribution or the debtor has adjusted the budget.  So, the closer you are to being even, the less likely it is that there will be a reaffirmation hearing set by the judge.

 Applies To Secured Debt Only

Reaffirmation agreements apply only to secured debt such as vehicles, furniture and electronics and those items.   Very important, real estate, which is secured obviously, is not subject to a reaffirmation agreement under the bankruptcy code.  However, you will find lenders that will send you reaffirmation agreements pursuant to real estate.  In those cases, we advise our client that we are not authorizing them to sign it and we are not signing it because it effectively puts them back on the hook for debt that they no longer need to be back on the hook for because they can still keep it.  However, vehicles are different.  If you don’t sign a reaffirmation on a vehicle, even if you’re current, the lender can pull that vehicle because you did not execute a valid reaffirmation agreement.  Three are a couple of different agreements people send out even though there is only supposed to be one standard one.  They are very similar, but you just need to look through them, it’s a reading exercise, make sure that they are filled out properly.  Make sure that there are no changes.  If there are changes, we need to justify what those changes are.  The court wants to know.  It is part of that consumer protection element.  So that’s reaffirmation in chapter 7 which is the only chapter which it applies.  We mostly see it in cars.  We usually have it before the 341.  We always want to make sure that we keep a copy of it and we send an executed copy over to the creditor.

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