In light of a recent and important case from the Ninth Circuit Court regarding “reaffirmation” agreements, it may be a good time to talk about what a reaffirmation agreement is.
Technically, such an agreement in bankruptcy law is made between the debtor or the person who filed the bankruptcy, and the creditor who was owed money prior to the bankruptcy filing. That agreement “waives” the discharge of the debt that would occur at the end of the case if nothing were done.
In English…debtors owe creditors money for things like cars and houses. Those creditors maintain a security interest in the home or car to protect them should the debtor not pay.
If the debtor fails to pay for the home or car, the creditor will repo or foreclose to try and recoup the loss, and then maybe, especially where cars are concerned, sue the debtor for any remaining balance owed.
When a bankruptcy is filed by the debtor, that obligation to pay on the particular debt will be discharged or wiped away should the case reach a successful conclusion.
What happens if the debtor gets the discharge of the debt and the creditor with the security interest is not being paid?
The creditor will eventually take the asset that was previously acting as security anyway, but the debtor will be free from ever paying the debt back.
The problem? The debtor doesn’t want to lose the asset.
He or she simply wants to pay as they were and keep the house and the car.
Prior to 2005, most Courts allowed for the debtor to simply continue to make the house and car payment directly to the lender, and NOT sign a reaffirmation agreement in Bankruptcy. Most of the time, the lender simply accepted the payments and continued as if nothing had happened.
BUT something had, because no reaffirmation agreement was signed, the debtor got the best of both worlds. He or she kept the asset, continued making payments on it, but the obligation to pay was gone.
This meant that if sometime after the bankruptcy was over, the debtor didn’t want the car anymore, it would be surrendered and the lender could never sue the debtor for the deficiency balance that may be owing.
Of course, lenders have never been happy about this arrangement.
In 2005, bankruptcy law was changed. It changed in relation to reaffirmation agreements in that it appeared to the debtor to choose at the outset of the case to reaffirm the debt related to a house or car, risking debt after the case was over if the asset was eventually surrendered or lost. The debtor could also choose to surrender, or “pay” i.e. one lump sum, for the asset as well.
Despite this many continued to simply “retain and pay” as described above. This situation i.e. the attempt to figure out what the law really required in relation to home and car loans, has been the subject of some fighting and much speculation throughout the country.
It appears to be answered now, at least in the 9th Circuit Court of Appeals. Visit this entry to read more.