Why Should I Have My Customer Reaffirm in Bankruptcy?

B&BTake a moment for “Bits & Bytes” as Deanne Koll discusses the reasons why a lender should have its customer reaffirm a debt in bankruptcy.

Disclaimer: This video is designed to be educational and informative, but it is not legal advice. Collection law is constantly evolving and subject to change. Each situation is unique, and each case should be addressed to fit the unique situation.

When a debtor agrees to reaffirm a debt, the debtor agrees to be personally liable on a debt, after the discharge in the bankruptcy case. Normally, upon receiving a discharge in bankruptcy, a debtor is relieved from any personal liability on debts incurred prior to the bankruptcy filing.

For example, if I owe my attorney $200 and then I file bankruptcy and receive a discharge, that attorney is forbidden from collecting that $200. If a customer reaffirms, however, the circumstances change.

When a debtor signs a reaffirmation agreement in bankruptcy, that debtor agrees that he or she will remain personally liable on a debt after the bankruptcy discharge. This usually occurs on secured debts on which the debtor desires to continue to pay post-bankruptcy.

A common example is a real estate mortgage on the debtor’s homestead. If the debtor expresses a desire to keep the home post-bankruptcy, a creditor should require a debtor to sign a reaffirmation agreement. If the reaffirmation agreement is signed, and the debtor later defaults, the debtor is still personally liable on the note.

Meaning, if there is an eventual deficiency, he or she will remain liable for that amount.

On the other hand, if the debtor does not sign a reaffirmation agreement, but continues to pay on the mortgage and then years later defaults, the creditor is forbidden from seeking a deficiency judgment on any shortfall because of the failure to obtain a reaffirmation agreement in the underlying bankruptcy.

As you can see, this is a tricky area of the law, and you should seek legal advice on reaffirmation options regarding any specific situation.

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