Short answer: Usually not.
Longer answer: Let’s start with what a reaffirmation agreement is. A creditor may ask a debtor in a New York bankruptcy to sign a reaffirmation agreement to renew the debt related to a secured asset. The creditor’s goal is simple: making money off the debtor in exchange for probably nothing.
To be more specific, bankruptcy cancels most contracts debtors sign with creditors, including those for houses or cars. For agreements that are secured by some kind of collateral, bankruptcy will discharge the debt relating to that agreement but it usually won’t eliminate the lien the creditor has on the asset. So while debtors are no longer personally responsible for the debts, if they stop paying them, the creditors can try to repossess or foreclose on the collateral. The simple solution for debtors is to just keep making the regular payments, if possible, and not worry about it after that.
Debtors who can’t keep making the regular payments are better off short-selling the properties or losing them to their trustees.
The reason creditors are so eager to obtain reaffirmation agreements is that if debtors run into problems in the future, the agreement gives the creditors legal means to compel payment from the debtors. This can include wage garnishments, passing the debts to debt collectors, and lawsuits against the debtors. The advantage for creditors is that the debtors probably won’t be able to discharge those debts for several years from a future bankruptcy.
Whether a debtor should sign a reaffirmation depends on what is securing the loan. If it’s a house, the answer is almost never. Chapter 7 debtors who are current on their mortgages have no incentive to reaffirm them, and those who are behind on their mortgages probably can’t catch up on their payments anyway. Unless there’s a reason to keep the house, like if it’s handicapped accessible, a reaffirmation agreement won’t do much good.
For cars the situation is different because debtors usually need their vehicles to drive to work and earn the money they need to live. If they need their cars and either can’t exempt them entirely or redeem them, then a reaffirmation agreement can keep the auto lender from repossessing the vehicle. However, debtors often exit bankruptcy with better credit ratings than when they entered, so it’s entirely possible to be able to obtain credit for another car post-bankruptcy at affordable payments. Sometimes it’s for less than what they were paying pre-bankruptcy.
Fortunately, as I discussed in my second post about who chapter 7 bankruptcy debtors are, reaffirmation agreements are much less common in New York bankruptcy and Brooklyn bankruptcy than the national average, possibly because fewer debtors in New York City own cars. However keeping a secured property can be necessary and complicated in chapter 7, so if you are encountering serious financial problems, then talking to an experienced New York bankruptcy lawyer can help you strategize your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
