Reaffirmation Agreements and Excess in Chapter 7 Bankruptcy

After filing a bankruptcy petition and before discharge is granted, a debtor may voluntarily reaffirm any otherwise dischargeable debt. Reaffirmation effectively continues the debt obligation as though a bankruptcy petition had not been filed, even though the debt is otherwise dischargeable.

Creditors love reaffirmation agreements and debtors should be cautious when signing one. Unless the debtor has a clear reason for reaffirming the debt there is usually little reason to enter into reaffirmation agreements unless the creditor makes some major concessions on its debts. The only exception is secure debt. Secured debt is debt that is backed by property…. Like a car loan for example. For more detail see our blog entitled “Secured Assets and Reaffirmation Agreements.”

This blog addresses what the Court looks at to see if a reaffirmation agreement will be allowed. In your petition you must disclose your income and your expenses. The difference between these final numbers will be your excess. If this number is in the negative this means your expenses are higher than your income.

Every reaffirmation agreement looks at your income, your expenses, and the monthly payment for the reaffirmed debt. If a debtor’s income cannot cover expenses and the reaffirmed debt’s monthly payment, then there is a presumption of abuse. This usually means that the reaffirmation agreement will be denied, and the secured property must be returned with the deficiency discharged.

So, if a debtor wants to keep property secured by a loan through a reaffirmation agreement there must be enough income to cover, or the reaffirmation agreement will likely be denied by the bankruptcy court as abusive.