What is debt reaffirmation?
In almost all cases where the debtor has a car loan or a mortgage, the creditor asks that the debt be reaffirmed. Except in rare instances, we strongly recommend against reaffirming any debt.
Reaffirming a debt is promising all over again to pay the debt even though it is discharged in the bankruptcy case. Being discharged means that the person filing for bankruptcy never has to pay the debt. Getting a discharge is the entire reason for filing for bankruptcy, so why would anyone ever want to promise all over again to pay a debt they do not have to pay?
For mortgages, it had originally been claimed by some banks that if the debtor did not reaffirm the debt, the bank could still foreclose on the house, even if all payments were up to date. In a New York case, the court said that this was not true; that if the payments were being made, the bank could not foreclose.
Mortgage Reaffirmation
When someone gets a mortgage, they make two promises. The first is when they sign the mortgage note. They are personally promising to pay the money they are borrowing for their house. The second is a promise that if they do not pay the money they are borrowing, the bank can foreclose on the house. The first promise is made by signing the mortgage note. The second promise is made by signing the mortgage itself. In bankruptcy the first promise, to pay the money, is discharged. The second promise, giving the bank the right to foreclose on the house if the payments are not made, continues. Thus, the bank is left with only promise number two, and asks for a reaffirmation of the mortgage note, which gives them back promise number one. However, since the bank will not foreclose if the payments continue to be made, there is no reason to re-make that promise.
Car Loan Reaffirmation
With cars, the promises are similar. The borrower signs a note, promising to pay, and gives a lien (instead of a mortgage) that allows the bank to take the car back if the payments are not made. With cars, the situation is different, because the right of banks to pick up cars has been affirmed, and some banks do pick up cars the, if the loan is not reaffirmed. However, here, too, we do not recommend reaffirming loan except in one instance. The only car loan provider that actually picks up cars is Ford Motor Credit (and their subsidiaries, such as Mazda Credit). As of this writing, no other lender picks cars up so long as the payments are being made. This, of course, could change, but it has been this way for years and is expected to continue. Only if a client’s loan is with Ford, and only if they absolutely must keep their car and cannot replace it with another, do we go along with a reaffirmation.
Why Reaffirming the Debt Is Not Recommended
The reason we do not recommend reaffirmations is that neither we nor the client can predict the future. While the client may be in a position to continue to make the payments now, if something happens in the future, such as a medial emergency or loss of a job, and they miss payments, the car will be picked up. Then the car company holds one of their auctions at which very little is received for the car and sends a bill for the balance to the client, who having just gone through bankruptcy, now has a very large bill to pay and cannot file bankruptcy again.
If a client does not reaffirm, but keeps making the payments, and then something happens, they may lose their car, but they will not have to make any more payments to the bank for the car. This is why we strongly recommend against reaffirmation.
Before considering reaffirmation, a great deal of thought is needed about the consequences. One should discuss these consequences with a lawyer who is familiar with bankruptcy law.
Allan Bloomfield practices bankruptcy law in Forest Hills, Queens. Contact Allan today for a free consultation.
