Before we discuss the financial prudence of reaffirming on the debt, we should first establish whether the court will allow you to reaffirm on a secured debt. We first look to whether the reaffirmation would be an abuse. Expect that each jurisdiction has different levels of scrutiny. In my home district, the court is relatively relaxed on the subject. In Chapter 7, most of my clients can reaffirm on any debt they choose without much hassle. Where it gets sticky is when debtors choose to reaffirm unusually expensive debts and/or debts for “toys”. If the debtor could conceivably afford to pay their unsecured debt by ditching luxury items, then the trustee could certainly object that there is some abuse going on. In Chapter 13, the analysis is much the same, but a little more restrictive. Secured debts squeeze out money available for unsecured creditors. Our trustee tends to disallow secured debts for luxury or recreational items (including more than one vehicle per debtor) unless the debtor is willing to match the secured payment for the unsecured creditors – which may be expensive!
Once it has been established that the reaffirmation is not an abuse, the next question is whether it is financially wise for you to reaffirm. You will need to make a prudent decision as to whether the reaffirmation is in your best financial interest. Here, the court will largely defer to your decision, but they will often step in to evaluate your decision and in some cases, override your decision. The basic factors to consider:
Is the debt necessary? Usually yes if it is your home or primary vehicle. Less so if it is for a timeshare, your third vehicle, or big-screen TV.
Is the collateral over-financed? It might be time to cut your losses if you are paying $18,000 for a 1994 Geo Metro, even if you can afford it.
Can you afford the payment? Analyze the principal balance, the interest rate, length of the loan, and monthly payment. If you’re living on $20,000 per year, you probably can’t afford a $300,000 mortgage.
Can you get a new loan for new collateral at a better deal after bankruptcy? Reaffirming on secured debts that existed before filing for bankruptcy is an excellent and easy way to rebuild your credit. But don’t discount the possibility of finding a new loan after bankruptcy that will have better terms.
In Chapter 7, many of your secured creditors will send you a reaffirmation agreement to sign. Even if you have decided to reaffirm the debt, you might not necessarily want to sign the agreement. First and foremost, if you default on your loan payment after you have entered into a reaffirmation agreement – you will be liable for the whole amount of the debt. Your bankruptcy discharge will not protect you from collection efforts. Second, although failure to sign a reaffirmation agreement can be interpreted as a technical default and invite repossession, the odds are next to nil that a creditor would repossess your property despite you remaining current on payments.
In short – reaffirming secured debts can help rebuild your credit, but you should only reaffirm on what you need and can afford.