Legal Representation for Los Angeles Residents in Bankruptcy Proceedings

Reaffirmation Agreements in California

A reaffirmation agreement is an agreement that you will continue to owe your debt even after receiving a bankruptcy discharge or a dismissal of your case. This means that the secured creditor’s lien on the collateral, as well as your personal liability, will survive with no impact from your bankruptcy.

If you reaffirm your debt, the lender will likely allow you to retain collateral as long as you keep up with the payments you owe. The reaffirmation agreement must be filed in bankruptcy court as part of your case, so that the court can review the agreement. A judge has the authority to reject a reaffirmation agreement that would create an undue hardship.

You can enter into a reaffirmation agreement in California if your equity in a piece of collateral that has not been paid off is exempt. If it is nonexempt, the trustee will want to sell the property as part of your nonexempt assets. The proceeds from the sales will be distributed to your creditors.

For example, if you owe $5,000 on a motorcycle before you file for Chapter 7 bankruptcy, and the lender threatens to repossess the motorcycle because you are behind on payments, you may need to negotiate a reaffirmation agreement. In some cases, the lender may be willing to negotiate a lower amount. You should only reaffirm an agreement to pay when it is the only way a creditor will allow you to keep collateral you absolutely need, and you have a steady source of income that will allow you to pay off the balance.

Often, a lender is willing to renegotiate because a vehicle loses value immediately after it has been sold, resulting in the lender taking a loss if it has to try to sell the vehicle used at an auction. You may be able to get the amount of the payment reduced, reduce your interest, or get a reduction on the total owed. If a lender has to sell the vehicle at auction, the lender can bill you for the difference between the amount received at auction and what you owed, which is known as the “deficiency balance.”

However, when you file for Chapter 7 bankruptcy, you are trying to walk away from debts and get a fresh start. If you are so stressed financially that it makes sense to file bankruptcy, it may be wise not to reaffirm a debt. This is because you will still have to pay the deficiency balance after you receive a discharge on all your other debts. For example, even if you got into a vehicle accident that damaged or destroyed the vehicle on which you reaffirmed your debt, you would have to repay that debt under the reaffirmation agreement. Moreover, you will have to keep up with your payments during bankruptcy after entering into the agreement.

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