Reaffirming a debt in a Chapter 7 bankruptcy involves the Debtor signing an agreement with the creditor agreeing to remain personally on debt even though the Debtor filed bankruptcy. It is not necessary to reaffirm debt to keep collateral like a house or car after filing bankruptcy.
Lenders can recover such collateral if the payments are not kept current by the Debtor. This is true whether or not the debt is reaffirmed. However, if the debt is reaffirmed, then the lender can sell the car at auction and still come after the Debtor for the amount still owed. If the debt is not reaffirmed, then the debt is discharged in the bankruptcy. That means the Debtor is no longer liable on the debt, and so all the lender gets is the car but cannot later try to collect money from the Debtor.
One advantage to reaffirming debt is that when you reaffirm and keep the payments current, as you must do to keep the collateral, then it is more likely the creditor will report to your credit bureaus after bankruptcy that you are current on your loan. This is helpful information that tends to increase your credit score. Many lenders will not report anything to your credit report if you keep payments current without reaffirming, but some lenders will still report you are current even if you do not reaffirm. Lenders should not be reporting to credit bureaus that you are not current on a debt discharged in bankruptcy as this is effectively an attempt to collect on a debt discharged in bankruptcy which is not allowed.
The money owed on first mortgages are frequently paid in full by the creditor after they foreclose. Unless the amount owed is more than the home is worth, there is usually much less risk of the Debtor owing money after a foreclosure on a first mortgage. So, it can make more sense to reaffirm on a first mortgage. It is rarely a good idea to reaffirm on second mortgages, as these debts are rarely paid anything in a foreclosure, leaving the Debtor who reaffirmed them liable on the full balance.
It can be more difficult to refinance a mortgage if the mortgaged debt is not reaffirmed. Indeed, the current lender on a loan not reaffirmed will rarely refinance a debt not reaffirmed in bankruptcy as there are legal problems with them seen as trying to collect on a debt discharged in bankruptcy. Lenders are different, so if after bankruptcy you have trouble refinancing on a mortgage you did not reaffirm, you should shop around looking for a lender who is willing to do just that.
The decision whether to reaffirm a debt or not can seem complicated and intimidating, but you should talk to your attorney to discuss whether it is in your best interest to reaffirm or not reaffirm secured debts.
By Bill Turner, W M Law Attorney