Reaffirming a debt in a Chapter 7 bankruptcy

On Behalf of | Nov 27, 2019 | personal bankruptcy |

Most people in Indiana and Illinois file a Chapter 7 bankruptcy petition with the idea that they will ultimately be able to discharge most of the obligations that are causing them financial headaches. Why, then, would anyone want to consider exempting one or more of these debts from the discharge offered by personal bankruptcy? The answer to this question may surprise some people.

The short answer is that the debtor wants to preserve a financial relationship with the creditor. Usually, this wish is motivated by the debtor’s desire to retain possession of an asset in which the creditor has a lien or other right to repossess the asset in the event of a default. An order of discharge in a Chapter 7 proceeding does not abolish the creditor’s security interest. Rather, it merely absolves the debtor of the obligation to repay the loan. Thus, the issuance of an order of discharge is equivalent to a default by the debtor, and the creditor may, if it wishes, reclaim the asset that was pledged as security.

The debtor can avoid this outcome by reaffirming the debt. This is accomplished by the debtor executing a reaffirmation agreement with the creditor, in which the debtor agrees to continue to make payments on the underlying obligation. In making a reaffirmation agreement, the debtor must disclose sufficient income to repay the reaffirmed debt. If the debtor was not represented by an attorney prior to signing the reaffirmation agreement, the court will schedule a hearing to ensure that the debtor is fully informed about the consequences of reaffirming the debt.

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