When you file a Chapter 7 bankruptcy and have a car loan, a mortgage, or other secured debt for personal property, there is a good chance that the lender will send you a reaffirmation agreement to reaffirm the debt. Reaffirming a debt in bankruptcy means that you are agreeing to remain legally obligated to pay that debt, despite having filed a bankruptcy that would otherwise discharge it. Typically, it is not in a debtor’s best interest to reaffirm a debt because the debtor will then be liable for the entire debt should they later default on the loan. However, a debtor must comply with his/her stated intentions as to that debt. So, how do you navigate this situation where a reaffirmation of a debt is not in your best interest, but you must comply with a stated intention to reaffirm?

The United States Bankruptcy Code requires “court review reaffirmation agreements for debts secured by personal property where debtors are not represented by attorneys in the negotiation of the reaffirmation agreement.” 11 U.S.C. § 524(k). In re Moustafi, 371 B.R. 434 (Bankr. D. Ariz. 2007). “Such agreements are only effective if approved by the court as not imposing an undue hardship on the unrepresented debtor of her dependents and as being in the debtor’s best interest.” In re Moustafi. What this means in Arizona, is that if a debtor has filed his/her stated intentions and performed the stated intentions by timely submitting a completed reaffirmation to the creditor, but the reaffirmation agreement is later denied by the court because it would impose an undue hardship and was not in the debtor’s best interest, the creditor may not repossess the property, as long as the debtor remains current on the loan payments and insurance.

The bankruptcy court typically does not approve reaffirmation agreements on secured debt unless a debtor can show that they have enough disposable income each month to pay the debt to the secured creditor. Many people that file bankruptcy don’t have sufficient disposable income to appease the court in this situation; typically part of the reason the debtor filed a bankruptcy petition in the first place! One of the reasons for this requirement is because the court does not want to put a debtor in a situation where they are going to find themselves in a financial crisis just after filing a bankruptcy petition to find relief from a previous financial crisis.

There are many varying facts of every individuals case, so it is important to speak with a knowledgeable bankruptcy attorney to determine whether you should reaffirm a debt in your bankruptcy. Call Platt & Westby, P.C. today at 602-277-4441 or use the form below to schedule your no obligation bankruptcy consultation for assistance.