If you file a Chapter 7 bankruptcy, you may be faced with having to decide whether to sign a “reaffirmation agreement.” This is the first of a series of posts I’ll do explaining what reaffirmation agreements are, what they do, how they work, along with South Carolina Bankruptcy Court procedure for entering reaffirmation agreements. Most importantly, I’ll address the issue of whether you should ever sign a reaffirmation agreement.
Let me apologize ahead of time. The law is in this area is confusing. Current Bankruptcy Code provisions dealing with reaffirmation agreements are very poorly thought out. But I’ve tried to make this as clear as I can, and this topic is very important to those of you filing a Chapter 7 bankruptcy.
First, What’s a Secured Debt?
To understand what a reaffirmation agreement is, you must first understand the difference between a secured and an unsecured debt.
A secured debt is a debt where property, called collateral, is pledged as security for repayment of the loan. Put simply, if the borrower doesn’t repay the loan, the creditor may take the collateral and sell it to help satisfy the debt.
An everyday example is a car loan. If I want to buy a car and need a loan to buy the car, the lender, let’s say GMAC, will take a security interest in the vehicle at the same time they loan me the money for the car. GMAC, therefore, is a secured creditor.
There are two parts to my agreement with GMAC. Part one, I borrowed money. Because I borrowed money, I have liability to repay the loan. Part two, I gave GMAC a security interest in the car. Again, no pay, then no car. The repo man cometh.
A reaffirmation agreement says the debtor agrees to remain personally liable on the debt. In effect, the debtor says, I give up the benefit of my bankruptcy discharge on this debt.
Reaffirmation Agreements—Some History
Now, let’s turn our attention to reaffirmation agreements themselves. First, you must understand that reaffirmation agreements are dealt with differently in different bankruptcy districts.
For example, the way in which reaffirmation agreements are treated here in South Carolina is very different than the way they are dealt with in Michigan. But I thought bankruptcy law was federal law, so isn’t it the same in all 50 states? While this is a very logical assumption, the answer is a resounding NO!
Why? In 2005 Congress passed BAPCPA, which stands for Bankruptcy Abuse Prevention and Consumer Protection Act. Because the new law is so poorly drafted, some bankruptcy attorneys began calling the new law BARF (“Bankruptcy Abuse Reform Fiasco”). The current Bankruptcy Code is perhaps the most poorly drafted piece of legislation that’s come out of Washington in a very long time—maybe ever. There are many sections of the Code interpreted in drastically different ways in different federal districts and circuits. So what may work in one part of the country may not work in another. We even have a section of one part of the Code with no designation. It’s referred to as the dangling paragraph. No, I’m not making this up.
Let’s get one thing out of the way first. Reaffirmation agreements have nothing to do with real estate. So for your home, for example, it’s very clear you do not have to reaffirm your mortgage note. See In re Wilson, 372 B.R. 816, 820 (D.S.C. 2007). When we talk about reaffirming, therefore, we’re only talking about personal property, not real estate. Also, you don’t enter into reaffirmations in Chapter 13 (a payment plan bankruptcy), only Chapter 7.
In “Bankruptcy Reaffirmation Agreements (Part Two),” I’ll address these questions:
- What does a reaffirmation agreement do?
- Do I have to reaffirm?
- What if I don’t reaffirm?