If you have secured loans and you file Chapter 7 bankruptcy, you may need to sign a reaffirmation agreement if you want to keep the property you pledged to get the loan. In certain circumstances, the court might hold a hearing to determine whether to approve the agreement -- this is often called a reaffirmation hearing.
If you have a secured loan, it means you pledged certain property as collateral when you took out the loan. If you don't repay the loan, the lender can take the property. Common secured loans include car loans, mortgage loans, and some loans for furniture or jewelry.
When you file Chapter 7 bankruptcy, you can choose to repay a secured loan if you want to keep the property. To do so, you must sign a reaffirmation agreement, which is a contract between you and the lender in which you promise to repay the loan under its original terms in order to keep the property. If you do not sign a reaffirmation agreement and agree to repay a secured loan, the lender maybe be able to repossess the property (although not always).
For more information about reaffirming secured debts, including reasons why you might or might not want to reaffirm, read our Reaffirming Secured Debt in Chapter 7 Bankruptcy article.
A bankruptcy debtor (a person who files bankruptcy) can enter into a reaffirmation agreement as long as the agreement is voluntary, the case has not yet been discharged, the debtor's attorney has fully counseled the debtor on the repercussions of the agreement, and the agreement will not impose an undue hardship upon the debtor. If all these criteria are met, the agreement does not need court approval.
If any of these conditions are not met, the court will schedule a hearing to determine whether it will allow the reaffirmation agreement. The most common reasons that a court schedues a reaffirmation hearing are
If you sign a reaffirmation agreement, your attorney must also sign it attesting that she has discussed it with you and explained the consequences. If you don't have an attorney or if your attorney has refused to sign the agreement, the court will hold a hearing.
Example. Alice has a car that she still owes money on. She hires an attorney and files bankruptcy. At the time, she is current on her car payments, but her payment is very high. Her attorney refuses to sign the reaffirmation agreement because he believes she cannot afford the car. Alice signs the reaffirmation agreement without her attorney, and the court schedules a hearing before the judge.
When you file your bankruptcy, you must file schedules showing your income and expenses. Your expenses must include payments on any debts you plan to reaffirm, and the difference between your income and your expenses should be above zero with the reaffirmed debt payment included. If the reaffirmed debt payment puts you in the red, there is a presumption of undue hardship, and you will have to attend a hearing to explain to the court how you will be able to afford the payments and why you need to keep the property.
Example. Tony owes money on his car. He files Chapter 7. He brings home $2,500 per month in income. Including his car payment, his expenses are $3,000 per month, which puts him at a negative $500 per month in income. The presumption of undue hardship arises, and Tony must go to a hearing to prove to the judge that he needs the car and can afford the payments.
If the court schedules a hearing for your reaffirmation agreement, you will wait in the courtroom until the judge's clerk calls your case. Your attorney will also appear if he represented you in the reaffirmation agreement (he may also appear if he did not represent you, as the judge will want to know why he refused).
When the judge's clerk calls your case, you will approach the podium. The judge will explain why the hearing was called, and you will need to provide proof to the judge that reaffirming the debt will not impose an undue hardship on you; that is, even if you take on this payment, you will still be able to afford all your necessary expenses for yourself and your dependents. You will also likely need to testify that you understand the consequences of signing the agreement (for example, that if you default on the loan after the bankruptcy is over, you are responsible for the debt regardless of your bankruptcy discharge).
If the judge is satisfied by your testimony and proof, she or he will approve the reaffirmation agreement, and you will be able to keep the property after your bankruptcy is over, as long as you make the payments per the agreement.
Example. Todd filed bankruptcy without an attorney. He has a modest car payment, and he needs his car to go to work. His income is $3,000 per month and his expenses, including his car payment, are $2,900 per month. The court holds a hearing because Todd signed the reaffirmation agreement without an attorney. Todd provides the judge with proof of his income and expenses and testifies that he needs his car for commuting. The judge approves the reaffirmation agreement and Todd can keep his car.
If the judge feels that the agreement will be an undue hardship on you, he or she will disapprove the reaffirmation agreement. At that point, the lender can repossess the property, although certain types of lenders, such as mortgage lenders, will allow you to keep the property if you continue to make payments, even if there is no reaffirmation agreement.
Example. Jason has been unemployed for nine months and files Chapter 7 bankruptcy. Jason still owes money on his luxury SUV, which he bought when he had a job. His car payment is $800 per month. Jason can scrape together the money to pay for his car payment every month with his unemployment and assistance from his parents. He wants to reaffirm the debt, but his lawyer refuses to sign, because she believes the payment is too much. Jason goes to court, and the judge disapproves the reaffirmation agreement, because the payment is unreasonable and creates an undue hardship. Jason must surrender the car to the lender and discharge the debt.