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REAFFIRMING DEBTS IN A KENTUCKY OR INDIANA BANKRUPTCY CASE

SHOULD I REAFFIRM ANY DEBTS WHEN I FILE BANKRUPTCY?

When one files Chapter 7 bankruptcy in Kentucky or Indiana, a discharge is received by the debtor at the conclusion of the case. This discharge releases the debtor from all dischargeable debts that were incurred prior to the filing of the bankruptcy case. Certain debts survive bankruptcy, such as child support and alimony, most student loans and certain taxes.

A reaffirmation agreement is a legally binding document that the debtor enters into with a creditor, pursuant to which the debtor agrees that an otherwise dischargeable debt will not be discharged and therefore, will survive the bankruptcy filing. This means that this particular creditor with whom the debtor entered into such an agreement can take legal action to collect the debt after bankruptcy if the debtor defaults, even though the debtor may have received a discharge of all of his other debts.

Why would someone want to reaffirm a debt? The most common situation is where the creditor has a lien or mortgage on something that the debtor owns and wishes to retain, such as an automobile. In that case, if the debtor wishes to retain the automobile, he must sign a reaffirmation agreement if the creditor requires it. If he refuses to sign it, then the creditor has the right to repossess the automobile even if the debtor is current with his payments. In deciding whether to reaffirm a debt, the debtor should always take into account the value of the property that he is retaining by signing the reaffirmation agreement versus the amount owed on the loan. If the amount owed on the loan far exceeds the value of the property being retained, then it does not make any economic sense to reaffirm because it would be the equivalent of re-buying the property at an inflated price.

What about a debt that is completely unsecured? Generally, if the creditor does not have a lien on anything that could be repossessed, then there is no need to reaffirm the debt. All you are doing is obligating yourself to pay something that the law makes clear you don’t have to pay. Since the primary purpose of filing bankruptcy is to obtain a fresh start by coming out of the bankruptcy as debt free as possible, then reaffirming debts when there is no benefit to be obtained undermines that goal.

When it comes to real estate, the law is a little different than it is with regard to personal property such as automobiles. While reaffirming on an automobile loan is mandatory under the bankruptcy code, unless the creditor doesn’t require it, it is optional when it comes to real estate. With regard to real estate mortgages, the debtor can simply maintain payments and keep the property without signing a reaffirmation agreement. However, if one chooses to go that route, he will not obtain the benefit to his credit from making future payments on his mortgage because those future payments will not be reported to the credit reporting agencies. The reason for that is that there is no “debt” to report since the underlying obligation has been discharged. The mortgage holder may also terminate certain services such as automatic bill paying and paying online. The mortgage holder may also be unwilling to modify the loan in the future if there is no reaffirmation agreement signed. Finally, when it comes time to refinance or buy another house, there will not be a trade line of payments on the credit report that helps build up a credit score.

The decision on whether to reaffirm a home mortgage or not when filing bankruptcy in Kentucky or Indiana is really a judgment call. On the one hand, reaffirming the debt provides certain advantage in terms of credit standing, but also exposes the debtor to substantial risk in the event of default. For if the mortgage debt is not reaffirmed, then the creditor’s only recourse in the event of default is to sell the property, whereas if the debt is reaffirmed, then the creditor can also pursue the debtor for a deficiency balance (the difference between the amount the property sold for at foreclosure and the balance owed on the debt).

Before deciding whether to reaffirm a debt, consider all of the factors and seek the advice of your Kentucky or Indiana bankruptcy lawyer.

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