When most people in Illinois decide to file a petition in bankruptcy, they expect the proceeding to discharge most, if not all, of their debts. Why, then, would a bankruptcy petitioner consider entering into an agreement with one or more creditors to reaffirm the debts owed to these creditors? The answer is straightforward: to retain possession of an asset that is securing repayment of a debt.
The rationale for reaffirmation
When the bankruptcy court enters an order discharging the petitioner’s debts, the order acts like a decision by the debtor to stop making payments. From the creditor’s point of view, the discharge of a debt is the same as a default by the creditor. In such cases, creditors want to exercise their rights to seize the asset that was pledged as security for repayment. The debtor, on the other hand, may wish to retain possession of the asset.
An automobile is a convenient example. The bankruptcy proceeding only discharges the debt representing the unpaid portion of the purchase price. The creditor can still seize the vehicle because the bankruptcy order is an event of default. A reaffirmation agreement can stop that from happening.
The mechanics of entering a reaffirmation agreement
To properly reaffirm a debt, the debtor must sign a written reaffirmation agreement before the court enters the order for discharge. The agreement must then be submitted to the court for approval.
The debtor must make certain disclosures in connection with the agreement. The debtor must disclose the amount of the debt being reaffirmed, how the debt was calculated, and an admission that the debtor knows that the debt will not be discharged in bankruptcy. If the debtor is represented by an attorney, the attorney must certify that he or she has advised the debtor in writing about the effect and consequences of the agreement.
Make informed decisions
Before entering into a reaffirmation, a debtor should consult an experienced bankruptcy attorney. A capable lawyer can advise the debtor about the consequences of signing a reaffirmation order and assist the debtor in deciding whether to pursue reaffirmation of any debts.