By Kitty J. Lin
You just received your discharge order from the bankruptcy court indicating your debts are now discharged and your case is closed. Congratulations! You now have a fresh start free from burdensome debts. What do you do now? Some people want to pay back some of their creditors due to a sense of obligation (for example, some people want to pay back their dentist who they have been going to for years and who has never hounded them for payment, or their friends or family members who have loaned them money to get by throughout the years). Whatever the reason, there is no law against voluntarily repaying a debt from post-petition funds (meaning money you obtained from whatever source after you filed your bankruptcy case). Does repaying that debt mean you re-obligated yourself to that debt, essentially reaffirming the debt? The short answer is no. In order to reaffirm a debt you have to follow the strict guidelines outlined in 11 U.S.C. §524(c). See In re Charles Lopez 345 F.3d 701 (2003).
When your experienced bankruptcy attorney files your bankruptcy case and you receive a discharge of your debts your personal obligation to repay that debt is discharged. This applies to even secured debts such as your car or home mortgage. Don’t get me wrong, this does not mean you do not have to repay your car loan or home mortgage to keep the car or home. Since the car loan is a secured debt, if you do not repay the debt your car loan lender can repossess your car. However, given your personal obligation was discharged in the bankruptcy case the car loan lender cannot go after you for any deficiency balance if there are any. If you sign a reaffirmation agreement as part of your bankruptcy, this is essentially a new contract in which you are re-obligating yourself to that debt. If you sign the reaffirmation agreement and then you cannot make payments on that debt the car loan lender can repossess your car and go after you for any deficiency balance.
You filed bankruptcy to get rid of your personal liability to repay your debts. Why would anyone sign any reaffirmation agreement? Unfortunately, in the Ninth Circuit, In re Dumont (581 F. 3d 1104, 9th Cir, 2009) holds that a car loan creditor can repossess your car if you did not sign a reaffirmation agreement. It does not matter even if you are current on the loan – your creditor can still repossess your car. You have essentially 3 different options after you file your bankruptcy case regarding secured debts: 1) surrender the car; 2) redeem the car for the fair market value (meaning you pay your lender a lump sum payment of what the car is worth rather than pay what you owe on the car – this is only good if your car is heavily upside down); and 3) reaffirm the debt. The good bankruptcy lawyer unspoken 4th option to keep the car and continue making payments on it (sometimes called a “ride through”) is no longer available to consumers based on In re Dumont. However, it is still advisable to speak with your car loan lender to see if they are wiling to offer you that option. Most lenders still can offer it. Some lenders, like Ford, will require you sign a reaffirmation agreement in order to keep the car. Keep in mind, you should not and you do not have to reaffirm huge debts like mortgages on your house because you do not know what the future holds. You do not want to be in a situation where you cannot pay your mortgage and your mortgage holder comes after you for the debt in the future.
Once you have finally made a decision to reaffirm the debt, your lender has to follow the strict guidelines of §524(c) to reaffirm the debt. Essentially they have to provide you with full disclosure of what the terms are and the reaffirmation agreement has to be signed completely voluntarily and cannot be an undue hardship for you. Once you sign the reaffirmation agreement the creditor files it with the court. If you sign the reaffirmation agreement without the representation of a bankruptcy lawyer, there is a hearing in front of the judge. This hearing is to protect you and to make sure the creditors are not taking advantage of you. If the judge thinks it is an undue hardship for you to reaffirm the debt he or she can reject the reaffirmation agreement. The judge can also sign off on the reaffirmation agreement if he or she believes it is in your best interest. The reaffirmation agreement has to be filed with the court before the case is closed. Once the case is closed no further reaffirmation agreements can be entered into. Therefore, you do not have to “accidentally” enter into a reaffirmation agreement because it has to follow these guidelines.