Should I Sign Reaffirmation Agreement in Chapter 7 bankruptcy to Keep My Home or Car?

July 29, 2010

By: David M. Serafin

As an experienced Aurora bankruptcy lawyer, I’ve had a countless number of clients in my law practice who are essentially threatened by a lender to sign a Reaffirmation Agreement regarding any secured debt.  This most often applies in a chapter 7 bankruptcy and typically concerns a home, vehicle or even a boat or appliances.

I rarely ever recommend that a debtor in Colorado sign a Reaffirmation Agreement in general and I NEVER recommend this with regarding to a mortgage debt.  Why?  Because a Reaffirmation Agreement is essentially a brand new contract which retroactively revives any personal liability you would have otherwise discharged in the bankruptcy.  What would happen if, a few years down the road, you again fall behind in making monthly payments on the same secured debt that you had previously reaffirmed?  If this is your home, the mortgage lender could not merely foreclosure on your home but ALSO sue you for the deficiency resulting from the foreclosure auction sale.  For instance, if your mortgage debt (at the time of the foreclosure sale date) is $250,000 but your home is only valued at $200,000, if you previously signed a Reaffirmation Agreement in your current bankruptcy matter, the mortgage lender could (even years later) obtain a judgment against you personally for the remaining $50,000 mortgage deficiency, even if you have since surrendered your home.  So, to reiterate, I NEVER recommend affirming a mortgage loan in bankruptcy.

Regarding reaffirmation as to a vehicle or any other secured property, the analysis is a bit different.  In some circumstances, depending on whether you have equity in your vehicle, it may be advisable to sign a reaffirmation agreement as to a vehicle.  This is because, even if you’ve been current on your monthly payments, the lender still often has the right to repossess the vehicle absent a signed reaffirmation agreement.  The vehicle loan documents may state that the filing of a bankruptcy by itself constitutes a default under the terms of the contact.  And if the same vehicle has any equity (and Colorado bankruptcy exemptions allow you to keep a portion of a vehicle’s equity), it may not be worth the risk of the vehicle being repossessed.         

In any case, you should be aware that a lender cannot force any debtor to sign a Reaffirmation Agreement in Colorado.  And you certainly should never sign a reaffirmation agreement if you have any doubts about being able to continue making the monthly payments because, if you do sign a reaffirmation agreement, you may not only have the lender repossess your vehicle but you may also face a lawsuit on the lender’s request for a deficiency judgment on the balance between the debt on the vehicle and what the amount for which the lender sold the vehicle.

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